Bloomberg News

How Drug Gangs’ Failed Lime Foray Is Carstens Win: Mexico Credit

June 20, 2013

Mexican Soldiers Patrol in Michoacan

Mexican Army soldiers patrol the entrance of the Buenavista Tomatlan during an operation in the state of Michoacan in Mexico on May 22, 2013. Photographer: Alfredo Estrella/AFP/Getty Images

The Mexican army is helping central bank Governor Agustin Carstens rein in inflation.

The annual rate of inflation fell for the first time in four months to 4.63 percent in May, with lime prices dropping the most since April 2011, after the government sent troops to western Mexico to ensure the safety of farmers who were being extorted by drug cartels. The prices of the fruit, which accompanies everything from tacos to beer and salsa, doubled in the first four months of 2013 as barricades set up by the farmers to protect themselves disrupted shipments from the nation’s biggest lime-producing region.

Bond traders have cut their expectations for cost-of-living increases from a six-month high earlier this month as the drop in food prices bolsters confidence Carstens will slow inflation to the nation’s 3 percent target. The so-called break-even rate, based on the gap between yields of inflation-linked bonds due in 2014 and similar-maturity fixed-rate debt, has fallen 0.15 percentage point since June 6 to 3.63 percent.

“The region in Michoacan where limes are produced was affected by security issues,” Benito Berber, a New York-based Latin America strategist at Nomura Holdings Inc., said by e-mail. “The impact on limes and therefore inflation is clear. The intervention of the army in order to un-block some of the roads was key” to transporting the limes and helping bring down those prices, he said.

Ricardo Medina Macias, a spokesman for Banco de Mexico, didn’t immediately respond to an e-mail seeking comment.

Extortion Fees

Limes’ weighting in the inflation basket is 0.21 percent, the second highest of all fresh fruits, according to the national statistics agency.

The plunge in lime prices shaved 0.03 percentage point off the consumer price index last month. Overall, the annual inflation rate fell two basis points from 4.65 percent in April.

Villagers in farming towns in Michoacan took up arms earlier this year against drug traffickers they say have been terrorizing them for years and forcing them to pay extortion fees for their crops and produce.

The armed brigades blocked passage to some roads leading out of the state before the army’s deployment in mid-May, when a deal was struck with the government to lift the barriers, Interior Minister Miguel Osorio Chong said May 21.

‘A Lie’

Lime distributor Tania Tamayo, 25, said she quadrupled prices of the fruit she sells at Mexico City’s main wholesale produce market when the blockade reduced supply. Her family, which she says pays cartels 1,000 pesos ($75.74) per truckload transported out of Michoacan, was cut off from the main lime-producing towns until the army was sent in, and prices have since dropped.

“Saying that the weather caused this is a lie,” Tamayo said, as workers dragged 24-kilo sacks of limes on their backs into her family’s stall. “It was the conflict.”

Cesar Rodriguez, 26, who ships limes from Michoacan to sell them in Mexico City, says when his truck drivers report being extorted by drug traffickers along their route he’s forced to raise his prices between 5 and 10 percent.

“Everything suggests that the pressures on lime prices respond to activity related to organized crime,” Erick Urtuzuastegui, an analyst at research provider Prognosis, said in an e-mailed message. It’s a “good example of how the violence related to drug traffickers has the potential to influence the pricing of some goods and general inflation.”

Self-Enforcement

While the Milenio newspaper reported a 2.5 percent drop in drug violence in the first four months of President Enrique Pena Nieto’s administration, communities in southern Mexico have armed themselves and kidnapped law-enforcement officials, saying police can’t protect them from cartels.

“The central part of our strategy is to guarantee the security of the people,” National Defense Minister Salvador Cienfuegos told reporters May 21 in Michoacan. “But at the same time, we’re freeing up the ability to move around, allowing the free transit of people, merchandise and vehicles.”

Mexico’s drug war has claimed more than 60,000 lives and reduced economic growth by an estimated one percentage point each year since the government began sending troops to fight cartels in December 2006, deploying them first to Michoacan.

Bird Flu

Enrique Alvarez, the head of Latin America fixed-income at IdeaGlobal, says that agricultural prices are beyond the control of police and security forces, and other factors could lead inflation to remain elevated.

The inflation rate climbed to a 30-month high of 4.77 percent in September as egg and chicken prices jumped amid a bird flu epidemic and a drought pushed up corn prices.

“You have weather issues, growth issues and health issues in the agricultural camp,” Alvarez said in a telephone interview from New York. “It’s very uncertain what is going to occur ahead.”

The extra yield that investors demand to hold Mexican dollar bonds over U.S. Treasuries widened 13 basis points to 224 basis points at 2:39 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps climbed 10 basis points to 148 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value if the issuer fails to comply with debt agreements.

The peso weakened 1.3 percent to 13.4160 per U.S. dollar.

Tamayo, the lime distributor, said once shipping routes were freed up, a surplus of limes flowed into her market stall, pushing prices down close to record lows.

“There’s a saturation of limes now,” she said. “The army came and everything grew calm.”

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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