The State of Hidalgo's agro-industry primed for growth

The largest single private investment in the history of Hidalgo, Grupo Modelo’s new brewery in the southern municipality of Apan opened in March 2019 and is a key anchor investment for the state.

Investment

Modelo’s MXN14bn ($723.9bn) funding represented 5.3% of Hidalgo’s 2017 GDP and reflects the agro-industry’s recent progress. Of the strategic sectors prioritised by the state’s Secretariat for Economic Development (Secretaría de Desarrollo Económico, SEDECO), the agro-industry has been making the most notable headway. According to SEDECO, the administration has received a total of MXN16.1bn ($832.5bn) of investments to the sector.

In choosing agro-industry, SEDECO hopes to channel new investments to a key sector for rural areas. This should also assist the sector’s modernisation and formalisation of business practices. Around 97% of Hidalgo’s localities are classified as rural, and 46% of the population lives in these areas. Furthermore, some 55% of the state’s territory is dedicated to agriculture and farming, and the sector accounts for 19% of employment. According to the OECD, rural areas tend to have high poverty rates and labour informality, with up to 45% of the labour population of the 10 poorest municipalities working in agriculture. The Secretariat for Agricultural Development underlined this point when the current state administration took office, highlighting that only 44% of local residents working in agriculture make the minimum wage, while about 22% do not receive any income.

SEDECO estimates that the average monthly wage for agro-industry workers in Mexico is MXN16,000 ($827), some 82% above the average of all economic sectors. It is also higher than the government’s other strategic sectors, like energy, sustainable transport and chemical pharmaceuticals.

Several agro-industry investments have followed Modelo’s initiative. The challenge is to ensure that these investments bring prosperity to the state and take advantage of Hidalgo’s role as a top national producer of barley, alfalfa, wild agave and corn.

Employment

The new brewery in Apan has the capacity to produce up to 12m hectolitres of beer annually, equivalent to 9.3m 355-ml beers per day. The company’s master plan shows the potential to double these numbers in the future.

Modelo’s project illustrates why the state government is seeking investments of this type. According to global ratings agency Moody’s, the investment, which it describes as positive for Hidalgo’s credit profile, will enhance the economy and increase its payroll tax collections with the new jobs it generates. These collections are the most important source of state-level tax revenue in Mexico.

Modelo’s records show that around 4500 workers were employed in the construction of the Apan plant, however, Moody’s says that when indirect jobs are taken into account the actual figure is as high as 10,500. Thus far, Modelo has hired 600 people to operate the brewery and expects this number will rise to at least 1200. Moody’s believes that once the plant is fully operational, it could generate up to 6200 direct and indirect jobs.

Some 70% of the workers at the plant are from Hidalgo, which should drive a 5% uptick in payroll revenue in 2019 and increase what Moody’s calls the state’s revenue efficiency, or the ratio of revenue from its own sources to total revenues. This ties into one of the OECD’s key recommendations: as the state has the fourth-lowest level of revenue collection in Mexico, it must increase its income. Moreover, the revenue increase should have a positive secondary effect, increasing the state’s share in Mexico’s General Participations Fund (Fondo General de Participaciones, FGP) – non-earmarked revenue transfers from federal to state governments. Moody’s predicts that the government will receive 7.7% more from the FGP than it averaged between 2013 and 2018.

Modelo estimates that between June 2017 and the end of 2018, the project at Apan had an indirect economic impact of MXN900m ($46.5m) through salaries, suppliers and raw materials. “Grupo Modelo, the state government and the local community have common interests in the Apan project,” Cassiano De Stefano, CEO of Modelo, told OBG. “While we obviously expect to have a financial return on the investment, it is an enormous opportunity for development in the area,” he said.

Resources

There are approximately 15,000 barley farmers working the land surrounding Apan. In April 2019 Modelo announced that it had increased its purchase of barley from local producers to 80%, with the remaining 20% purchased from the state. Since 2017 the company has purchased 100% of its supplies from Mexican producers.

Although Hidalgo has provided Modelo with barley for many years, the new plant is accelerating purchases. In the 2018 spring-summer cycle the company purchased just under 46,954 tonnes of the grain from the state and it expects this will increase to over 84,000 tonnes in 2019.

The company has initiated programmes to help the farmers, including training to increase productivity; new technologies; and Conecta Modelo, or Modelo Connects, which sends SMS messages directly to the farmers, offering logistical solutions and informing them of the prices at which the company is purchasing its goods. These efforts should begin to address what the OECD describes as one of the agricultural sector’s most pressing challenges: deficient marketing channels and excessive intermediation. “It is vital to offer barley farmers access to technologies that they would not otherwise have,” De Stefano told OBG. “Farmers should have the security of knowing that they will have customers for their goods,” he said.

Follow-on investments: In order for the government’s vision of Hidalgo as an agricultural centre to succeed, Modelo’s investment needs to spur interest in other companies. In February 2019 packaging company Envases Universales announced that it would invest MXN2.2bn ($113.8bn) in a new plant at Hidalgo’s Platah industrial park. This project will require some 200 technical workers. Envases Universales had been looking for a site with similar characteristics for some time, and Modelo’s arrival in Apan encouraged the company to set its sights on Hidalgo. It is expected to become one of the brewery’s top providers. “Modelo’s arrival undoubtedly triggered our investment in the state,” Alberto Galván Rodríguez, director at Envases Universales, told local media. Galván also said that Platah, which is situated adjacent to the Arco Norte highway, provides an ideal location given its proximity to potential clients in Mexico City, Querétaro and Toluca.

The sector has also seen recent investments from dairy company Grupo Lala, and flour and wheat producer Munsa Molinos. Furthermore, in 2018 US firm Al Dahra ACX said it would invest MXN413m ($21.4m) in Atitalaquía. The company purchases approximately 1000 tonnes of alfalfa per month from local producers. These investments provide some certainty to farmers in their ability to generate desirable prices for their products in the long term.

Further Expansions 

If the agro-industry companies already established in Hidalgo are any indication, the sector’s future looks bright indeed. There is strong potential for Modelo to double its capacity in Apan, as it has built a plant that is capable of incorporating new brands as needed. Meanwhile, Envases Universales says that its investment exceeds its current needs, but it was made with an eye on the market’s projected growth.

Another major player that has been in the state since 1995 is also expanding quickly. Cargill, a multinational agri-business company and the largest private corporation in the US by revenue, expanded its oils and refinery factory in 2014. In March 2019 it carried out a second expansion, investing MXN320m ($16.6m) in a new production line – the first of its kind in Mexico – to produce and bottle vegetable oil. This turned the company’s Hidalgo plant into its fifth largest globally. However, the state must continue to successfully build supply chains for agro-industry to become truly transformational for its economy. The OECD also wants to see a greater number of value-added products, with a “business approach in the use of technological innovations so as to improve the standard of living for the portion of the population dedicated to agricultural production”.

Modelo, at least, believes that the rural sector will grow hand-in-hand with the company. “We cannot guarantee that right now there is sufficient local capacity to produce the barley needed to double production in Apan, but we can guarantee that we will work together with the state and its people to make that growth happen,” De Stefano told OBG. “Our plan is not to increase production in the plant only to then go out and look for suppliers elsewhere.”

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The Report: Mexico 2019

Hidalgo chapter from The Report: Mexico 2019

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