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Margarita Fans Miffed as Mexico Lime Growers Limit Supply

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March 20 (Bloomberg) -- Lime growers in the Mexican state of Michoacan have banded together to both set prices of the fruit they sell to packing companies and control supply, spurring inflation that’s been above the central bank’s target range for the last two months.

Members of the Citrus Growers Association of Apatzingan Valley are limiting supply to guarantee a minimum price for producers, said Leonardo Santibanez, an association member and coordinator of its trade events. The policy emptied Michoacan’s main citrus market of limes on March 12 after association members told farmers not to harvest their crop that day as the group pushed for a minimum price of 23 pesos per kilo (80 cents per pound), he said.

The policy may be illegal, according to Miguel Flores Bernes, a former antitrust agency commissioner. Santibanez denied the growers were engaging in illegal activity.

The tactic has helped dry up margarita consumption in Mexico City as the fruit had become the biggest contributor to inflation nationwide, accounting for one third of last month’s increase in consumer prices. The unexpected increase in lime costs may combine with new taxes on sodas and junk food that took effect Jan. 1 to pressure inflation expectations further above policy makers’ target range, according to Nomura Holdings Inc.

“The shock of limes at a time when inflation is already high due to the tax reform is something we need to pay attention to,” Benito Berber, a strategist at Nomura, said in an e-mailed response to questions. Economists expect inflation to end the year at 4.01 percent, above the 4 percent upper limit of Banco de Mexico’s target range, according to a March 6 central bank survey.

Poor Quality

Manuel Ambrosio, a bartender at Bloo Bar in Mexico City, says he is reducing portions in the drinks he serves customers to trim his losses after limes rose. Sales of margaritas, a popular mixed drink of fresh lime juice, tequila and salt, have plunged 30 percent as customers complain about the poor quality of the fruit that he uses to reduce costs, he says.

“These limes have no juice,” the 28-year-old said, squeezing a wedge from a pile of limes sitting on his bar. “This is the worst I’ve seen prices in four years.”

Since December, the price of limes in Mexico City’s main wholesale market has tripled to 32 pesos per kilo through mid-March. Squeezed in everything from margaritas to chicken soup, limes hold the largest weighting among fruits in Mexico’s inflation basket after apples.

Lime Prices

In February, lime prices nationwide surged 68 percent from the previous month, contributing 0.08 percentage point to Mexico’s consumer price index, which rose 0.25 percent, according to the national statistics institute. The cost of the fruit soared 45 percent in January, pushing consumer prices up another 0.04 percentage point.

Annual inflation was 4.23 percent in February. The central bank’s head of operations, Jaime Cortina, said today at the Bloomberg Economic Summit in Mexico City that inflation will probably slow to below 4 percent by March or April.

The Citrus Growers Association of Apatzingan Valley “was formed so that producers can establish the price,” Santibanez said in a March 12 interview in the association’s offices. “For example, the association says to the distributors, ’we’ll put a price of 20 pesos.’ They can’t go lower than that. The producers will receive 20 pesos at a minimum.”

Lime Infestations

Leandro Alcantar, the president of the Citrus Growers Association of Apatzingan Valley, wasn’t available for comment.

Association members have been able to push up prices after lime infestations from the neighboring state of Colima crimped production, making Apatzingan the producer of almost all of the fruit consumed in Mexico this year, according to Santibanez.

Mexico is considering increasing lime imports to combat their high price, Economy Minister Ildefonso Guajardo said March 14.

In addition to disease attacking Colima’s fruit, atypical rainfall hurt production in Michoacan, reducing supply, he said.

Santibanez said that the practices by association members are legal. He said price setting is only occurring in one step along the supply chain -- the producers’ sale of limes to packing companies. The final cost to consumers remains fluid, he said.

Price-Fixing

An investigation into price-fixing would only happen if a complaint is filed, Alfredo Castillo, who was appointed by President Enrique Pena Nieto to improve security and economic and social development in Michoacan, said in a March 12 interview.

The Federal Economic Competition Commission, the nation’s antitrust agency, declined to comment when contacted by Bloomberg News.

Recent violence in the state as armed vigilantes push drug cartels out of the area is also generating price speculation among producers, according to Castillo.

Roberto Pacheco, who owns 8 hectares (20 acres) of lime groves on the outskirts of Apatzingan, said that he’s seen association members establish price minimums, as did Alejandro Martinez, another lime grower.

“Everything points to an accord among competitors,” Flores Bernes, the former antitrust commissioner who currently works as a lawyer, said by phone March 13. “If they are competitors, they can’t agree on prices, neither a ceiling nor a floor.”

55,000 Hectares

Producers founded the Apatzingan association in 2009 for its 4,500 members in order to stop the practice of packing companies paying below-production costs, Santibanez said.

The group’s growers cultivate 55,000 hectares across the Tierra Caliente valley and currently pick about 2,000 tons of the fruit per harvest day, which the association’s members have limited to three days a week, he said.

Lime prices will start to drop by the end of March as Colima’s production increases, Santibanez said. “We’ll get to around 12 or 15 pesos per kilo.”

Last year the government removed duties on lime imports after prices surged 20 percent in April, helping drive inflation to 4.65 percent. In 2012, egg prices jumped 16 percent in early July due to a bird-flu outbreak, pushing inflation up to 4.45 percent.

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 Philip Sanders, Robert Jameson

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