Incentivizing Agricultural Modernization

Mexico must focus on two areas if it is to maximize its agricultural potential: technology and the modernization of its production, says Íñigo Pérez-Rasilla, Director General of SOFAGRO, a nonbank financial institution. “We are on the verge of a great explosion of untapped potential that will position Mexico as one of the largest food producers in the world but we need to modernize our production methods to strengthen our position.”
Pushing producers to modernize and use newer technologies is easier said than done, particularly when the agricultural tradition is intertwined with the country’s history and identity. However, Pérez-Rasilla is confident that synergies between the government, large export companies and financing entities can accelerate the process.
Large producers have no problem modernizing and investing in new production methods that would allow them to become more competitive and to export larger quantities. Small farmers with less arable land and limited income tend to be more resistant to change. Pérez-Rasilla says that farmers need to see a tangible benefit when transforming their production. “They need to have incentives to change. Otherwise they will continue doing things in the same way their grandparents did.”
Pérez-Rasilla says that in most situations subsidies do not make sense but this case represents an exception because the final result would be to transform production. A coordinated strategy between SAGARPA and financiers that includes accessible interest rates and payment plans could give farmers the needed capital to modernize their production techniques and become more competitive. “The Agricultural Trust Funds (FIRA) must also provide incentives for financiers by imposing lower interest rates on the loans these financiers receive when they finance a technology-related project,” says Pérez-Rasilla.
Lack of access to capital is one of the most significant constraints that farmers often face but pressure from buyers and large exporters could prove pivotal. “Large exporters also need to play an important role. It is more plausible for farmers to transform their production methods if their buyers and large exporters demand they modernize production to comply with international standards,” says Pérez-Rasilla. “These players must move hand in hand to help farmers modernize their production. You have to make it easy for them or they will never do it,” adds Pérez-Rasilla. “It is important to provide real and tailored solutions for their problems, even if the solution is not traditional within the financial world.”
The lack of specialized funding for agriculture is not inherent to Mexico. Pérez-Rasilla says that every country’s agricultural sector faces the same basic challenges: climatologic conditions, plagues, dependence on international market prices and changes in consumer trends and preferences. “Financiers must understand the problems and adapt to these.” Adapting to changing conditions means that financing entities must always be aware of the number of factors that can affect crop performance. “The countryside is subject to a number of variables that farmers cannot control, such as international prices. We cannot take the easy way out and simply foreclose.”
The call for modernization comes as Mexico seems to be adapting to the new normal marked by uncertainty regarding ties with the US but Pérez-Rasilla says the agricultural sector has so far been immune. “Distributors and exporters are not as concerned about US politics. Their US clients continue to ask for the same product volumes. If the US imposes a tax on Mexican agricultural products, our exports there might fall a bit but other markets will pick up the slack.” In a worst-case scenario, Pérez-Rasilla says that Mexico’s geographic location allows the country to export to Europe in a competitive way. “We export everything to the US because it is close and convenient.”
Pérez-Rasilla believes that regardless of international developments, Mexican agroindustry is positioned to become one of the most relevant players on a global level and the arrival of new investors and global companies to the Mexican scene is a reflection of that. “The thing about the countryside is that it is an inexhaustible source of wealth; the more you invest on it, the better for everyone,” Pérez-Rasilla says.