ABSTRACT:  This is the second of two reports on the Mexican rice market prepared for the U.S. Rice Producers Association by the Texas Agricultural Market Research Center. The reports provide important insights on the opportunities and challenges for future growth of U.S. rice exports to Mexico, particularly with the potential for NAFTA-induced tariff reductions to alter the competitive position of U.S. rice in Mexico.  This study explores and analyzes the current structure of the Mexican rice market and derives implications and provides recommendations to guide strategic planning.  This report also serves as background to the first report, an in-depth statistical assessment of the logistics and transportation system for U.S.-Mexico rice trade and the impact that changes in Mexican tariffs will have on that trade.
 

EXECUTIVE SUMMARY:  This report is the second of two on the Mexican rice market prepared for the U.S. Rice Producers Association by the Texas Agricultural Market Research Center.  This second report explores and analyzes the structure of the Mexican rice market and derives implications to guide strategic planning.  This report also serves as background to the second report, an in-depth statistical assessment of the logistics and transportation system for U.S.-Mexico rice trade and the impact that changes in Mexican tariffs will have on that trade.  Together, the two reports provide important insights on the opportunities and challenges for future growth of U.S. rice exports to Mexico, particularly with the potential for NAFTA-induced tariff reductions to alter the competitive position of U.S. rice in Mexico.

The analysis in this study relies on data from publicly available sources on Mexican rice production trends and practices, prices, consumption, and trade, including official Mexican and U.S. government data and reports. Data and information compiled by the Mexican Rice Council (COMEARROZ) was another key source.  Information was obtained from telephone calls to knowledgeable sources in Mexico.  The research staff of the Texas Agricultural Market Research Center (TAMRC) also conducted two surveys in Mexico to supplement the previously published information. The first primary data collection effort was a two-part survey of the major Mexican rice millers and packers to determine the specific attributes of rice and conditions of trade that are of interest to Mexican rice buyers.  The second survey entailed market-intercept interviews of rice consumers in Mexico City and Monterrey.

Although Mexican producers supply the Mexican market with a number of rice varieties, about 60% of Mexico’s rice consumption is imported.  Rice moves from points of production and ports of entry to mills, packers, manufacturers, warehouses, and retail outlets of various types.  Most domestically produced rice and imported rough rice is milled and packed by a small number of rice millers.  Only few firms in Mexico pack imported milled rice or rice milled by domestic millers.  Some rice and rice by-products in Mexico go directly from mills to manufacturers of soups, cereals, and other food products and beverages.  Most of the rice from mills and packers, however, enters the food distribution system, passing through central warehouses (centrales de abasto) or moves through government hands for distribution to supermarkets, tiendas de abarrotes (small retail grocery stores), and public markets.  An increasing volume of rice in Mexico is beginning to flow directly from mills and packers to supermarkets, a phenomenon that is occurring throughout Latin American across a wide variety of food products like meat, fruits, and vegetables.

In Mexico, rice is consumed both as a highly-processed, high value-added product (such as parboiled rice in a prepared soup) and as a less processed product (such as bulk brown rice).  Most commonly, however, rice is commonly sold as processed, white rice and purchased in consumer-ready packages as plain, uncooked rice.  Unfortunately, there is little or no information available on the share of rice that is purchased in various types of packaging and distributed through the various distribution outlets.  Such information is critically needed for strategic decisions regarding retail marketing and promotion activities.

The surveys of Mexican rice millers provided insights on the rice milling industry in three areas: (1) the image of U.S. rice among Mexican millers, (2)  factors with the potential to impact the access of U.S. rice into Mexican markets, and (3) suggestions to enhance the competitiveness of U.S. in Mexico.  Salient points raised by Mexican rice millers included the following:

• The primary factors that determine their choice of foreign rice supplier included, in order of importance: (1) price and quality, (2) availability, (3) reliability, (4) tariffs, and (5) transportation.  Sales promotion programs (by alternative suppliers) were considered only moderately important and the country of origin ranked as the least important factor.

• Asian suppliers are not currently competitive in the Mexican market due to: (1) phytosanitary restrictions imposed by the Mexican government on imports of Asian rice and (2) Asian rice can only be purchased by the ship load.

• Mexican rice millers believe that good quality rice can be imported from alternative international sources, even though American rice has some advantages.  There is some preference for U.S. rice given comparable quality and price because of: (1) greater assurance of quality, (2) faster and more secure shipping, and (3) the possibility to import small volumes.  Mexican millers are satisfied with the quality and uniformity of U.S. rice.

• The country of origin is not as important to Mexican millers as price and quality  in their rice purchasing decisions.

• Mexican millers are concerned about the continuing reduction of the tariff differential between milled and rough rice and the potential effect on their business.  Even so, the larger millers have been relatively successful in competing with imported white rice under NAFTA.

• The three most important factors for selecting a mode of transportation are (in order of importance): (1) the quantity to be transported; (2) the cost; and (3) reliability.

• The terms of credit offered by the supplier was the highest ranked among the factors listed as influencing rice purchases by the Mexican millers responding to the survey.

• Mexican millers do not routinely use futures markets to hedge their rice purchases and expressed little concern about the risk associated with fluctuations in rice prices and transportation rates.

• Only two of the millers interviewed claimed to be doing any type of sales promotion.

• Mexican rice millers have little or no knowledge of U.S. rice promotion programs.

• Suggestions by Mexican millers for how American rice suppliers might improve their competitiveness in the Mexican market, included:

• Keep prices down
• Speak Spanish and learn Mexican culture
• Provide credit
• Directly distribute and sell U.S. rice in Mexico
• More direct contact with U.S. rice suppliers needed
• Share the risk
• Jointly promote rice

• Mexican consumers purchase rice as frequently as one to three times per month on average and consume rice four to six times per week.

• Most Mexican consumers serve rice as “sopa seca,” white rice prepared with some vegetables such as peas and/or beans and perhaps a little meat.  Sopa seca is most commonly served in Mexico as a first course before the main meal.  Many Mexican consumers also serve rice as an accompaniment to main courses.  Few serve rice as a main dish or in other ways.

• Mexican consumers consider rice to be a high quality food product.  The food characteristics consumers found most lacking in rice include:  (1) uniformity of product, (2) good source of fiber, (3) nutritive, and (4) short preparation time required.

• Mexican consumers differentiate between two main rice types: (1) long grain or Sinaloa type rice and (2) “Morelos” type rice.

• Most Mexican consumers are unaware of the country of origin of the rice they purchase.   Most would buy Mexican-grown rice if they knew the country of origin.  Few have much interest in purchasing rice specifically of U.S. origin.

A plan for expanding the Mexican market for U.S. rice could incorporate either or both of two general strategies: (1) grow the market through generic rice promotion efforts or (2) target promotion efforts by providing services to millers and building consumer preference for U.S. rice.  Generic promotion programs have been commonly used by other U.S. commodity associations (United Soybean Board, U.S. Meat Export Federation, etc.) but are quite costly.  In addition, some of the benefits are also enjoyed by competing foreign suppliers.  The USA Rice Federation has apparently conducted generic rice promotion programs in Mexico for many years.  Unfortunately, rice millers and consumers appear to be largely unaware of those efforts.

Targeted promotion efforts essentially attempt to increase market share without necessarily increasing total consumption.  Based on the results of this study, targeted promotion programs that might have some success include alliances with a Mexican milling/packing firm to develop new brands identified as U.S.-origin rice or couponing in Mexico to enhance sales of U.S.-origin rice.  Designing and evaluating  such promotion programs, however, will require more information on Mexican rice consumer behavior than currently available.  The consumer level market research conducted for this study provides conflicting results on whether Mexican rice consumers are price-conscious or highly brand loyal when buying rice.  Without question, the entry of new rice brands into the Mexican market would be a difficult challenge given the proliferation of rice brands and the strong position of a few long-established brands.  The apparent differentiation of rice types by Mexican consumers must be considered in any brand promotion campaign.

For targeted promotion strategic considerations, this study identified at least two important characteristics of the Mexican rice market that might be used by U.S. rice suppliers to boost the U.S. share of Mexican rice consumption: (1) the problem of price and exchange rate risk faced by Mexican rice millers in purchasing rice from foreign suppliers and (2) transportation and logistics issues.  Market share might be gained by U.S. rice suppliers by providing risk management services to Mexican rice buyers.  The benefit of providing such services is illustrated by an analysis of actual Mexican import transactions for rice.  Using futures contracts for rough rice and for U.S. dollar-peso foreign exchange can improve costs over an unhedged scenario by approximately 20%. The U.S. is in a more competitive position than other countries to offer risk management services because several relevant derivative contracts are available to importers of U.S. rice that may not be available to importers of rice from other regions of the world.

Regarding transportation and logistics issues, the geographic proximity of the U.S. to Mexico and the well-developed U.S. grain export logistics and handling systems should give U.S. suppliers a competitive edge in supplying high-quality, low-cost rice to Mexican buyers.  U.S. suppliers, however, face a key tradeoff in competitively supplying rice to the Mexican market: the need to balance the requirements of many Mexican rice buyers for smaller rice shipments against the potential efficiencies from bulk handling of large quantities of rice.  The costs of rice transportation and handling could be reduced if shippers were able to use bulk handling systems.  Where possible, rough rice exported to Mexico is handled in bulk, utilizing the Mississippi River barge system.  Rough rice in bulk, either ocean-going or in rail hoppers, is relatively less costly to ship than white rice in sacks.  A supplier who can assemble a unit train (50 or more hoppers), for example, would pay substantially lower transportation rates and could pass on the cost advantage to Mexican buyers.  In a competitive market, consumers in Mexico would benefit from the cost savings and consume more rice, thus increasing U.S. - Mexico rice trade.  However, Mexican rice importers often purchase relatively small quantities of rice, compared with the size of export shipments typical for other grains.  Mexican rice millers limit the size of shipments due to high storage costs in Mexico and the limited storage capacity at their mills.  Unfortunately, transactions costs on the smaller shipments desired by Mexican millers are high which results in higher costs of rice to Mexican consumers than would prevail if the most efficient handling system were used which restricts growth in Mexican rice consumption.  Strategies that allow for larger shipments of rice using the most efficient modes of transportation could be highly successful in increasing not only the U.S. share  but also the level of rice consumption in Mexico.
 

*  Victoria Salin, Gary Williams, Michael Haigh, Jaime Málaga and Jose Carlos Madriñán, Katharine Sheaff are Assistant Professor, Professor and Director of the Texas Agricultural Market Research Center, Assistant Professor, Assistant Research Scientist, Graduate Research Assistant and Graduate Research Assistant, respectively, in the Department of Agricultural Economics at Texas A&M University, College Station, Texas.