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Who'll Flatten Whom In The Tortilla Wars? (Int'l Edition)

International -- Latin America: MEXICO


Corn subsidies are ending. Now it's a free-market free-for-all

It's the lunchtime rush at New Tortilleria III on Prosperity Street in Mexico City. A white-smocked worker feeds fresh corn dough into a tortilla machine, where it's rolled flat, cut into saucer-size disks, and sent down a conveyor belt to be cooked. Another employee stacks the warm tortillas into baskets and weighs them out for neighborhood housewives at 30 cents a kilo.

The recipe for the thin corn cakes that are so much a part of the Mexican identity has changed little since pre-Hispanic times. But this tortilleria and 50,000 shops like it around the country are facing a momentous change. After a dozen years of free-market reform, the Mexican government is finally getting out of the politically sensitive, $3 billion tortilla business by ending decades of corn subsidies and price controls. The move will heat up a battle to supply Mexico's tortilla shops, pitting thousands of traditional dough makers against two giant producers of corn flour.

Until this year, the government was spending up to $1 billion annually to subsidize the tortillas that Mexicans consume at the rate of 110 kilos a year per person. But falling oil revenues squeezed spending and forced three tortilla price hikes to within a few cents of the estimated market price. The government also raised the price of corn it sells to millers and stopped its subsidies to corn flour producers. In the 1999 budget, industry sources expect the overall tortilla subsidy to be zero, although the government hopes to broaden programs distributing free tortillas to Mexico's poorest. "You're liberalizing the most important food chain in Mexico," says food analyst Marco Vera at Deutsche Bank Securities in Mexico City.

By freeing prices, deregulation will allow tortilla makers to invest in new equipment. That will speed the switch already under way to making tortillas from corn flour instead of buying ready-made dough from mills. "Tortillerias are micro businesses," says Trade Under Secretary Israel Gutierrez Guerrero. "They need to be allowed to modernize."

For Mexico's two corn-flour producers, that raises the prospect of a sales bonanza. At Monterrey-based Grupo Industrial Maseca, the industry leader, and at formerly state-owned Grupo Minsa near Mexico City, executives are convinced that competition will spur thousands of tortillerias to shift to more cost-effective dry corn flour. "The government has been spoon-feeding the traditional millers, giving them corn at a constant price," says Maseca Chief Executive Eduardo Livas Cantu. Those days are over. Investors, sensing the change, have boosted the price of Maseca's American depositary receipts to 12 3/8 on the New York Stock Exchange, up 90% in the past two months.CONNECTIONS. To promote the switch, the flour makers are offering tortillerias credit to upgrade their equipment. Within five years, Livas expects 65% of tortillas to be made with flour, up from 43% now.

Flour makers as well as millers have had ties to the government. In 1990, under former President Carlos Salinas de Gortari, the government eliminated subsidized corn supplies to millers innine states where Maseca had plants. Critics complained that this was favoritism toward Maseca Chairman Roberto Gonzalez Barrera, a longtime Salinas family friend. But in 1993 Salinas privatized Minsa, which quickly boosted its market share from 9% to its current 28.5%. In the past two years, though, both companies have been hurt by a government cap on corn-flour subsidies. In this year's first nine months, Maseca'ssales dropped 8%, to $356 million, with profits of $34.4 million. Minsa lost $8.2 million on sales of $160 million in the same period.

In the coming free-for-all, some traditional tortilla makers have no plans to switch. "We've survived in spite of the subsidies, not thanks to them," says Tomas Puebla Salazar, whose family owns New Tortilleria III and dozens of other Mexico City tortillerias, as well as mills that supply them with dough. "With bigger volumes, we'll be able to compete on price." For upscale customers, he's already planning cheese tortillas and other specialties. With real competition around the corner, consumers at last may get the final say.By Elisabeth Malkin in Mexico City

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