International trade ; Agriculture - California ; California ; Mexico ; Agriculture - Mexico

Ronald Schmidt

Stephen O. Dean

English

Research Papers in Economics

FRBSF WEEKLY LETTER
May 19, 1989
The California-Mexico
Agriculture Connection
During the past decade, agrkulturallinks
between the u.s. and Mexico have grown con-
siderably. The volume of Mexican agricultural
products imported into the U.S. has risen 83
percent since 1982. Mexican imports no longer
serve solely to supplement U.s. production
during winter months. Increased production
along the border, where growing seasons are
similar to those in the Southwestern U.s., now
allows Mexican farmers to compete in U.S.
markets year-round. Moreover, lower costs have
induced many California firms to open agri-
cultural operations in Mexico.
As we discuss in this Letter, increased agri-
cultural ties with Mexico pose a challenge to
California's preeminence in vegetable produc-
tion. At the same time, these ties offer the
opportunity for California firms to move some
production and/or processing to Mexico to take
advantage of lower labor costs.
Increased competition
Although California's production of fruits and
vegetables has been rising, the state's share of
national and world production has been falling.
California provided 59.6 percent of total u.s.
consumption of fresh vegetables in 1982. By
1987 that share fell to 54.6 percent. During this
period, u.s. consumption of fresh vegetables rose
11 percent, but California production grew just
1.8 percent. Increased production from non-
California sources met the increased demand,
and as a result, prices remained relatively
constant.
Some of the increase in non-California produc-
tion came from other parts of the United States,
where, because of technological advances, it is
now possible to grow vegetables. For example,
new strains of broccoli have made Maine a
major producer of vegetables, with broccoli
production rising from virtually zero in 1981 to
over 3000 acres planted in 1986. Additional
research,aimed at overcoming disease problems
associated with vegetable production in the
Southeastern U.s., will boost production further
outside California.
Mexican imports
A more important source of competition to
California agriculture has come from Mexico. In
the 1970s, Mexican vegetable production took
place away from the U.S. border and had a dif-
ferent harvesting schedule than did production
in California. Consequently, Mexican vegetables
tended to extend the fresh vegetable season in
the U.s., instead of competing with California
production.
In recent years, the volume of imported Mexican
fruit and vegetables has soared, and production
has expanded into other seasons, competing
directly with California production. Between
1982 and 1987, U.s. imports of fresh vegetables
from Mexico rose 73 percent. During that period,
imports of traditional, California-grown crops
rose dramatically. Imports of Mexican asparagus,
tomatoes, and cucumbers increased over 50
percent, while imports of onions and carrots
more than doubled. U.S. imports of Mexican
vegetables in 1987 equaled almost nine percent
of California vegetable production, up from
about five percent in 1982.
Spurred by liberalized attitudes toward foreign
direct investment in Mexico, the development of
agriculture in border areas like Baja California
is a major reason for the increase in Mexican
production. Baja production has benefitted from
THE WESTERn ECOnOmy The Western Economy is a quarterly
review of economic conditions in the Twelfth Federal Reserve District. It is published in the Weekly Letter
on the third Friday of February, May, August and November.FRBSF
and taking advantage of these cost differences.
Many California farmers are moving labor-
intensive crops and production to Mexico, where
possible, and allocating California farmland to
machine-intensive crops. For example, broccoli
that is chopped by machine and used for soup
can be produced competitively in Salinas, Cali-
fornia, but sprigs that must be cut by hand are
produced more cheaply in Mexico.
Of course, chemical-free production has pitfalls.
It still is not known how willing consumers are to
purchase the less attractive fruit and vegetables
that typically are produced using chemical-free
techniques. Moreover, as past events in the
market clearly demonstrate, when high returns
are being realized, competitors will emerge to
imitate that success. Consequently, the need for
continuous innovation by California farmers to
retain their market shares will not diminish.
Similarly, production of vine-ripened tomatoes,
which are picked by hand, has been shifting to
Mexico, while hardier machine-picked tomatoes
have become the norm in California. In 1982,
Mexico supplied 19 percent of u.S. consumption
of hand-picked fresh tomatoes, while California
held 24 percent of this market. By 1987, however,
Mexico was the more important producer, with
Mexican imports accounting for 24 percent of
u.s. consumption and California products slip-
ping to 22 percent. In contrast, California's pro-
duction of machine-picked processing tomatoes
has increased dramatically since 1978.
Some California farmers also have responded to
increased competition by selecting products that
command a premium from consumers, such as
organic vegetables. At the 1988 U.S. Department
of Agriculture's Outlook conference, marketing
and product differentiation were central themes,
suggesting increased awareness of the profit
potential in "niche" markets. Growers that can
establish such niche markets often capture
greater profits because their products do not have
to compete directly with the generic world crop.
One option being considered by some California
vegetable growers is to capitalize on consumer
concerns about chemical use by switching their
production to chemical-free techniques.
Stephen O. Dean
Research Associate
Ronald Schmidt
Senior Economist
investment by Californian and other u.s. agri-
cultural firms. According to experts, most large
and many medium-sized growers in California
have direct links to Mexican agricultural produc-
tion. In many cases, firms have established joint
ventures with Mexican companies and are
actively engaged in production.
The opportunities
Californiagrowers have- responded to the
competition from 10wer"costMexican production
by diversifying their own production into Mexico
Cost competitidn
One of the advantages of Mexican production is
that labor costs are lowerin Mexico than in the
u.s. For example, farm labor in Baja costs just
three dollars per day compared to $40 per day in
the San Diego area. In addition to higher labor
costs, California growers face other threats to
their ability to compete as low-cost producers.
Rapid urban growth has increased the demand
for water and land, leading to rising farming
costs. Also, environmental concerns, such as
those expressed inCalifornia' toxic chemicals
initiative, Proposition 65, may eliminate some
low-cost production technologies that relyon
chemical applications.
Competition from Mexico also will increase.
Although water shortages and technological
limitations should slow the growth of Baja
production, the use of higher-yield strains and
new technology will encourage production in
other growing regions, and imports from Mexico
should continue to increase.
The increased investment has accelerated the
transfer of agriculture-related technology from
California to Mexico. Agricultural production in
some areas of Mexico has advanced to the point
that yields now are similar to those across the
border in Southern California. In fact, in Baja,
fresh-market tomato yields increased from five
tons per acre in 1970 to over 15 tons per acre in
1986, surpassing the 14 tons per acre achieved
by California farmers that year.
Moreover,competition will increase. The devel-
opment of strains of vegetables that can survive
in other climates will establish production in
new regions. Increased capabilities to store and
transport fruits and vegetables also will raise the
competitiveness of offshore producers.DISTRICT INDICATORS
(Seasonally Alljusted)
89Q1 88Q4 88Q3 88Q2 88Q1 87Q4 87Q3 87Q2
------ ------ ------ ------
AGRICULTURE
U.S. CROP PRICES, 1985"100 117.2 112.4 111.0 104.5 102.4 100.3 98.9 99.4
DISTRICT CROP PRICES, 1985"100 121.6 112.4 110.7 92.9 97.8 104.4 99.1 102.1
FARH CASH RECEIPTS, HILLION $ N/A 2353.5 2318.9 2237.6 2236.4 2182.9 2129.0 2111.9
CATTLE ON FEED, 1985"100 93.5 96.6 96.1 95.9 94.5 94.8 93.8 85.3
CATTLE PRICES, CALIFORNIA, $/CWT. 61.2 60.1 61.4 63.4 61.6 57.8 58.0 56.4
FORESTRY
LUHBER PRODUCTION, HILLIONS BOARD FEET 1600.2 1806.2 1547.1 1647.5 1718.1 1661.9 1687.1 1756.1
NORTHWEST LUHBER INVENTORY, HIL. BOARD FEET 2462.9 2575.3 2470.5 2501.7 2512.0 2469.4 2607.4 2641.7
U. S. LUHBER PRICES, 1985"100 113.0 109.6 113.4 113.3 110.6 109.4 111.8 107.2
ENERGY
SPOT PRICE OF OIL, $/BARREL 18.5 14.8 15.2 17.3 16.7 18.8 20.4 19.3
U.S. RIG COUNT 772.8 800.1 957.8 1061.7 973.8 1002.2 1037.5 880.0
DISTRICT RIG COUNT 67.1 65.8 93.4 96.9 79.1 99.5 102.9 82.6
FUEL HINING EHPLO~ENT, 1985"100 17.8 79.1 82.7 83.4 81.4 82.0 79.5 78.5
U.S. SEISHIC CREW COUNT 135.4 151.1 184.0 201.9 199.1 189.8 181.9 173.8
HINING
HINERAL PRICES, 1985"100 176.6 178.1 150.7 153.4 152.0 145.9 131.5 120.2
HETAL HINING EHPLO~ENT, 1985"100 173.5 167.1 161.3 153.3 146.6 132.2 126.4 119.9
CONSTRUCTION
NONRESIDENTIAL AWARDS 1435.4 1349.2 1571.7 1316.0 1463.8 1608.1 1476.1 1504.2
RESIDENTIAL PERHITS 31470 36229 32725 30907 27923 28694 30783 30200
WESTERN HOUSING STARTS, THOUSANDS 27.9 33.0 36.3 36.8 28.5 27.9 37.6 40.1
CONSTRUCTION EHPLO~ENT, THOUSANDS 986.9 967.5 946.8 934.4 919.4 903.6 899.2 901.5
HANUFACTURING
WAGES, CALIFORNIA, S/HOUR 11.0 11.0 10.9 10.8 10.8 10.9 10.8 10.7
EHPLO~ENT, THOUSANDS 3157.1 3131.6 3095.3 3094.0 3086.4 3054.4 3031.2 3009.6
DURABLES, 1985"100 104.3 103.4 102.7 102.5 102.3 101.5 100.7 99.8
CONSTRUCTION DURABLES, 1985"100 114.2 112.4 109.8 111.1 111.4 110.0 109.0 107.8
AEROSPACE, 1985"100 116.8 115.4 114.2 113.6 113.6 112.4 112.1 111.9
ELECTRONICS, 1985,,100 100.0 100.4 99.1 97.8 97.0 95.2 94.7 94.0
SEHICONDUCTOR ORDERS, HILLIONS $, NOT S.A. 1300.0 1066.0 1222.0 1269.0 1126.2 1056.8 967.3 980.7
WHLS/RETAIL TRADE EHPLO~ENT, THOUSANDS 4628.3 4559.2 4527.3 4479.9 4448.3 4395.6 4351.3 4314.8
RETAIL SALES, PACIFIC DISTRICT, HIL. S N/A 21842 20738 20559 20615 20133 19722 19531
SERVICES EHPLO~ENT, THOUSANDS 4910.6 4860.7 4793.8 4742.1 4693.2 4636,6 4569.8 4504.8
HEALTH CARE, 1985"100 116.2 115.5 114.3 113;3 112.3 111.5 110.2 109.0
BUSINESS SERVICES, 1985"100 128.7 127.1 126.2 124.8 122.3 119.5 117.3 114.8
HOTEL, 1985"100 125.3 124.9 121.9 119.8 119.5 118.2 114.8 112.1
RECREATION, 1985"100 110.9 108.5 104.6 105.7 106.7 108.6 106.2 105.3
FINANCE, INSUR. AND REAL ESTATE EHPLOYHENT 1226.7 1218.7 1212.7 1207.6 1204.9 1201.8 1199.7 1195.9
GOVERNHENT EHPLO~ENT, THOUSANDS
FEDERAL GOVERNHENT 627.5 617.8 610.0 608.7 611.7 612.4 607.4 606.5
STATE AND LOCAL 2644.8 2618.4 2594.0 2577.4 2548.5 2533.9 2511.9 2504.6
Data are weighted aggregates of available 12th District state data and are expressed as IIIOIlthly rates unless otherwise noted.
District Indicator data are constructed by FRBSF research staff from public and industry sources.
Opinions expressed in this newsletter do not necessarily reflect the views of the management ofthe Federal Reserve Bankof
San Francisco, or of the Board Qf Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Barbara Bennett) or to the author•... Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.OUt6 v::> 'o:>sPUI?J:I UI?S
WiL: xog 'O'd
O)SI)UOJ~ UOS
JO ~uo8
aAJaSa~ IOJapa~
Twelfth Dist'rict Business Sentiment Index*
% (1988-89)
100
GNP INFLATION UNEMPLOYMENT
PERSONAL INCOIlE
ANNUALIZED PERCENT GROWTH RATES
80
88Q4 88Q3 88Q2 88Q1 87Q4
ALASKA 9.8 3,9 8,6 2,1 2.6 60
ARIZONA 9.2 8.1 7.3 -1.2 14.4
CALIFORNIA 8.7 12.6 9.7 0.2 12.0
HAWAII 8.5 9.0 8.6 5.3 13.5 40
IDAHO 12.3 6.2 10.9 7.5 -0.4
NEVADA 17.8 15.4 14.7 5.8 13.1
OREGON 9.5 5.5 9.3 6.1 8.6
UTAH 11.9 9.3 11.6 -2.0 9.2 20 0 Worse
WASHINGTON 12.7 6.4 8.1 6.6 10.2 •
Same
12TH DISTRICT 9.5 11.0 9.5 1.4 11.5 0 0 Better
U. S. 8.7 7.3 7.4 4.6 11.6 ~~~~?'~o;o~~~~J,~~ft~o;o~~~ ~1:>~~)S'~o;o~~~
* The index is constructed from a survey of approximately
75·business leaders in the 12th Federal Reserve District.
__AGRICULTURAL EIIPLOYIlENT UNEIIPLOYIlENT RATES
A~NUALIZED PERCENT GROWTH RATES AVERAGE QUARTERLY DATA
89Q1 88Q4 88Q3 88Q2 88Q1 89Q1 88Q4 88Q3 88Q2 88Q1
ALASKA 6.4 8.1 -1.4 -5.8 1.4 ALASKA 8.5 9.0 8.8 8.9 9.3
ARIZONA 1.8 2.8 0.1 -0.7 2.3 ARIZONA 5.9 6.2 6.8 6.5 5.6
CALIFORNIA 4.3 3.1 3.1 3.1 3.6 CALIFORNIA 4.8 5.0 5.3 5.6 5.3
HAWAII 9.6 5.6 1.5 1.6 4.7 HAWAII 3.5 3.1 3.0 2.9 3.5
IDAHO 3.0 5.3 -3.9 13.2 5.5 IDAHO 5.5 5.5 5.5 6.3 7.4
NEVADA 5.6 11.1 7.7 5.3 9.6 NEVADA 5.4 4.3 4.9 5.5 5.7
OREGON 6.5 8.2 4.7 0.9 6.9 OREGON 5.5 5.1 6.0 6.1 6.0
UTAH 1.3 5.2 3.2 6.2 1.9 UTAH 4.3 4.1 5.1 4.9 5.2
WASHINGTON 6.9 7.2 4.0 3.7 4.8 WASHINGTON 6.0 5.7 6.7 6.6 7.0
12TH DISTRICT 4.6 4.2 3.0 2.9 4.0 12TH DISTRICT 5.2 5.1 5.6 5.8 5.6
U.S. 3.6 3.3 3.3 3.6 3.8 U.S. 5.2 5.3 5.5 5.5 5.7
* Year-to-date * Year-to-date

The California-Mexico agriculture connection

http://www.frbsf.org/publications/economics/letter/1989/el89-20.pdf

The California-Mexico agriculture connection

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Research Papers in Economics