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May 8, 2020

Pandemic Could Batter Mexico’s Dairy Imports

 |  By: Fran Howard

The global coronavirus pandemic has hit Mexico’s already faltering economy particularly hard, and that could have a ripple effect on U.S. dairy product markets. In the first quarter of this year, Mexico’s gross domestic product (GDP) fell 1.6%, compared with both the fourth quarter of 2019 and the comparable quarter a year ago. 

The International Monetary Fund is now predicting gross Mexico’s GDP to contract 6.6 percent, and Bank of America is expecting a drop of 8 percent. In Latin America, Mexico’s expected decline is second only to that of Venezuela, where the economy is in collapse. 

Monica Ganley, analyst with the Daily Dairy Report notes that Mexico’s economic issues predate the coronavirus pandemic. “The country entered a mild recession in 2019,” Ganley says. “The pandemic has only made the situation worse, and the true impact did not become apparent until March of this year, when the Mexican peso crashed, losing nearly 20 percent of its value over the course of the month.”

Mexico is the United States’ largest market for dairy products. According to USDA’s Global Agricultural Trade System, the United States exported $1.5 billion in dairy products to Mexico last year, accounting for roughly a quarter of all U.S. dairy exports in value terms “Facilitated by geographical proximity and tariff-free trade, Mexico has handily become the most important market for U.S. dairy exports, but severe challenges facing the Mexican economy could dim export prospects in coming months,” Ganley says.

Because Mexico’s economy is highly dependent on crude oil, the recent collapse in that market deepened Mexico’s crisis. “Despite falling domestic crude oil production in recent years, Mexico’s government remains disproportionately reliant on the oil industry, with the state-owned oil company Pemex providing an estimated 40% of the government’s revenue,” Ganley says. “With an overleveraged balance sheet and dismal market conditions, Pemex’s credit rating was slashed to junk in mid-April, sparking a debt selloff and significantly raising borrowing costs for the firm. Some analysts believe that Mexico’s sovereign debt could face a similar fate soon.”

Going forward, Ganley says that Mexico is unlikely to look to international markets, including the United States, for large volumes of dairy products due to its weak peso, extreme economic uncertainty, and foodservice demand decimated by the coronavirus. “Mexico’s imports of dairy products should slow until the situation normalizes,” she adds.

In the second half of March, Mexico closed schools and stadiums and recommended people stay at home. The following month, the Mexican government increased restrictions and suspended industries and services deemed nonessential. According to the Wall Street Journal, Mexico’s restrictions are likely to remain in place until the end of May for much of the country, with regions with low levels of contagion possibly reopening in mid-May. Yet even when businesses start to reopen in Mexico, the country’s severe economic downturn and growing numbers of people in poverty will likely continue to impact dairy demand for months, Ganley says.