Narcos-Versus-Farmers Feud Spurs Inflation Wagers: Mexico Credit

Photographer: Miguel Tovar/LatinContent/Getty Images

Armed men of a self-defense group patrol the mountain range on the outskirts of Paracuaro, in the state of Michoacan, Mexico, on Jan. 9, 2014. Close

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Photographer: Miguel Tovar/LatinContent/Getty Images

Armed men of a self-defense group patrol the mountain range on the outskirts of Paracuaro, in the state of Michoacan, Mexico, on Jan. 9, 2014.

For the second time in eight months, Mexico’s army is combing through Michoacan state’s lime-growing valleys to re-establish order as vigilante farmers battle with drug gangs.

Unlike the last time, though, when soldiers managed to quickly push back the cartels seeking to extort farmers, clearing the way for the transport of produce into Mexico City, their presence now has further stoked the conflict.

In a country where limes are a staple used in everything from tacos to margaritas, the escalating violence is adding to bond traders’ expectations for a surge in inflation, according to Bank of Nova Scotia. The breakeven rate, a gauge of estimates for annual cost-of-living increases, climbed to a three-month high of 3.58 percent last week.

“This conflict will definitely have an impact on agriculture prices, and that will be reflected in inflation, probably in coming months,” Marco Oviedo, Barclays Plc’s chief Mexico economist, said in a telephone interview.

The price of limes rose to 18 pesos ($1.36) per kilo on Jan. 17 from 10 pesos a month earlier, according to the website of Mexico City’s main wholesale produce market. Economy Minister Ildefonso Guajardo said Jan. 17 that the conflict hasn’t had an impact on inflation and that rising lime prices were caused by poor weather conditions.

Farm State

Michoacan is Mexico’s biggest farming state by production value, according to 2012 data compiled by the Agriculture Ministry. It’s the country’s second-biggest lime producer, third-largest in tomatoes and biggest in avocados.

The jump in lime costs follows the Jan. 1 increase in some sales tax rates and implementation of new levies on junk food and sugary drinks that already had investors bracing for an inflation pickup.

The breakeven rate, which is based on the yield difference between inflation-linked and fixed-rate bonds, has climbed from 3.55 percent since Congress approved the tax increases October 31 in an effort to reduce the government’s reliance on oil revenue. Yields on inflation-linked notes due 2016 fell 0.15 percentage point over that time to 0.53 percent on Jan. 17.

The peso was little changed at 13.2414 per dollar at 9:53 a.m. in New York.

Grupo Financiero Banorte SAB predicted on Jan. 6 that inflation will quicken to 4.89 percent in the first quarter, the highest rate since 2010, as the new taxes take effect. Annual inflation quickened to a six-month high of 3.97 percent in December, close to breaching the 4 percent upper limit of the central bank’s target range.

‘Community Police’

In Michoacan, where the Sierra Madre mountains run into Mexico’s Pacific Coast, federal forces intervened last week after masked farmers stormed government buildings in more than a dozen towns and threatened to take over the city of Apatzingan, leading to at least one civilian death, the Interior Ministry said. The farmers’ self-styled community police groups, which raided police stations to strip officers of their weapons, said at least four people died in a clash with the army.

While some armed brigades are cooperating with the army, others are refusing to return to their towns. One group took over another village on Jan. 17 in defiance of federal government orders.

Methamphetamine Trafficking

The farmers in Michoacan are refusing to lay down their arms until the government captures leaders of the Knights Templar, a spinoff of the Familia drug gang, Jose Manuel Mireles, a vigilante leader, said in an interview posted on YouTube last week. The Knights are linked to methamphetamine trafficking and widespread extortion of businesses, allegedly with the help of corrupt local officials, according to the government.

Jesus Murillo Karam,Mexico’s attorney general, said in November that some vigilantes were arrested for ties to a rival cartel from neighboring Jalisco state. The groups deny any involvement with organized crime.

“If this is controlled by the authorities and in the end the government takes control of the state, these prices should go down again,” Oviedo of Barclays said. If it’s not resolved quickly, “the outlook for political stability could get really, really bad.”

The government appointed a commissioner to head security efforts in Michoacan last week, including overhauling the state’s law enforcement agencies, disarming local police accused of working with cartels and having vigilantes give up their weapons. The government said Jan. 18 that federal forces have completed their task of taking over policing duties in targeted areas without further incident.

Drug War

Mexico’s drug war has claimed more than 60,000 lives and reduced economic growth since the government began sending troops to fight cartels in December 2006.

The price of limes, which has the second-highest weighting among fruits monitored in Mexico’s inflation gauge, doubled nationwide in the first four months of 2013 after vigilantes blocked roads. Distributors of the fruit say extortion by cartels has also led to higher prices.

“Inflation could be affected by the deepening of the problems in Michoacan,” said Araceli Espinosa, a debt strategist at Bank of Nova Scotia’s Mexico unit.

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net

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