Tortilla Politics.

A flood of cheap corn imports is drowning tortilla producers like Minsa in Mexico. Simple market forces or an electoral ploy?

MEXICAN TORTILLA COMPANY MINSA HAS COME A LONG WAY. In seven years, it has gone from a sleepy government-owned enterprise to a publicly owned concern. It's expanded its market share from 8% to 25% against tortilla-making giant Grupo Maseca by offering tortiller[acute{i}]as incentives-- such as new tortilla-making equipment--to switch brands. It now aims to gain 1% to 2% market share every year.

Last November, its efforts won attention from Dallas-based private equity firm Hicks, Muse, Tate & Furst, which bought a 32.5% stake in the company for $68 million, gaining five seats on its 11-member board of directors. The investment will allow Minsa to pay down some of its expensive peso debt.

But this is presidential election time in Mexico, and almost anything that can happen usually does. In Minsa's case, it's meant a rain of cheap corn imports, which has all but halted its revenue growth.

What does corn have to do with politics? Despite strong, year-round corn harvests, Mexico allowed record amounts of the crop to be imported into the country last year, which deflated its price. Corn is the main ingredient in tortillas, and low corn prices mean low tortilla prices. Allowing more corn to be imported than is needed is seen as a political effort to keep tortilla prices low after the government phase-out of tortilla subsidies early last year-- and presumably keep the Mexican electorate supine.

Whether it's government maneuvering or mere market forces at work, tortilla producers have been hit hard--Minsa in particular. Minsa sells a corn flour mix. But with the lower prices, mom-and-pop tortilla shops around the country have used more corn-based tortilla mix instead of corn flour-based products, making Minsa's revenues fall flat.

Cheap corn. Indeed, Minsa's sales volume dropped by more than a fifth to $500 million pesos--roughly US$50 million--during the third quarter last year compared to the same period in 1998. In a statement, Minsa admitted that low corn prices "significantly affected" its third quarter sales. "While the company anticipated that the market would stabilize by mid-year 1999, this has not yet occurred due to imports," the company said.

Few openly point to political motives as the cause of cheap corn--least of all Minsa executives, who politely skirt the issue. "Overall, the transition [to a subsidy-free market] has been smooth," says Juan Gargallo, Minsa's president and chief executive officer. As for corn imports, the opening "was a precautionary measure to avoid tortilla prices from skyrocketing," he says.

The Mexican Commerce Secretariat (Secofi), which is charged with dispensing corn import permits, did not return phone calls from LATIN TRADE seeking comment about its corn import policies. But Rolando Calder[acute{o}]n, an analyst who covers tortilla companies Minsa and Maseca for Santander Investment, thinks it was an intentional move by Secofi with the unfortunate side effect of hurting Mexican tortilla makers. "It's an oversupply with the intention of avoiding price increases in corn and tortillas," he says. "With the cheap corn prices, Minsa or Maseca can't recuperate their prices."

Tortillas, a main diet staple of approximately 45 million poor Mexicans, have often been a common ground between political and business interests. For example, Mexican political boss Carlos Hank Gonnilez, who was agricultural minister under President Carlos Salinas de Gortari, is perceived as enjoying an important role in Maseca: His son is married to the daughter of key shareholder and president Roberto Gonz[acute{a}]lez.

How tortilla politics may change after the July election is not known. So far, mainline politicians have remained mum on the issue. Francisco Labastida, the leading presidential candidate from the 71-year ruling Institutional Revolutionary Party (PRI), has "no policies on tortilla" prices, according to his spokesperson, Rosa Elba Arroyo.

But some observers predict corn prices will probably rise after the election, along with tortilla prices. Tortilla consumers will be the losers, and tortilla companies such as Minsa and Maseca--as well as their investors--will be the winners.

Charles Tate, a partner in Minsa's new investor, Hicks, Muse, Tate & Furst, is willing to wait it out. "It's a good industry to be in," Tate says. "It's one of only two [dominant] tortilla producers. It's a real basic business in Mexico and I don't think you ever run the risk of it going out of business." That is, unless the government pulls the rug out from under you.