By Christine Bolling
Market and Trade Economics Division

Steve Neff, and Charles Handy
Food and Rural Economics Division
Economic Research Service
U.S. Department of Agriculture

Agricultural Economic Report No. 760.

Foreign direct investment (FDI) has become the leading means for U.S. processed food companies to participate in international markets. Affiliates of U.S.-owned food processing companies had $30 billion in sales throughout the Western Hemisphere in 1995, nearly 4 times the level of processed food exports. This report puts U.S. foreign direct investment and trade in processed foods to the region into global perspective, and finds evidence that, in the aggregate for the 1990�s, trade and FDI are complementary--not competitive--means of accessing international food markets. Incomes have grown sufficiently in most countries to support growth in affiliate sales and U.S. exports, indicating a strong demand for a wide variety of processed foods.

The authors acknowledge the helpful reviews of Richard Brown, Nicole Ballenger, Mary Burfisher, Steve Haley, Dennis Henderson, Gregory Pompelli, David Skully, and Francis Tuan. The authors are especially grateful to Mary Burfisher, ERS, for running appropriate scenarios of the Burfisher-Robinson-Thierfelder CGE model and offering helpful comments on the presentation of the experiments� results.

Note: Use of company names in this report is for identification only and does not constitute endorsement by the U.S. Department of Agriculture.

Washington, DC 20036
March 1998

Exports alone are insufficient to measure the U.S. presence in international markets. The value of sales from affiliated companies in foreign countries typically dwarfs the value of exports alone. While the United States exported about $8 billion worth of processed food to other Western Hemisphere nations in 1995, U.S. affiliates throughout the Western Hemisphere recorded sales of $30 billion, nearly four times as great.

Those business affiliations come about through what is called foreign direct investment (FDI), typically defined as an investment of 10 percent or more in a foreign enterprise. The 10-percent threshold is assumed to give the investor a controlling interest in the enterprise. Most companies are majority-owned.

U.S. food processing companies had invested more than $11 billion in food processing affiliates in other Western Hemisphere nations as of 1995, nearly double the 1990 level. Those investments represented a third of total U.S. investments in foreign food companies.

Growth of U.S. investment in foreign countries is related to a number of factors:

• Rules regarding foreign investment were liberalized in a number of countries over the last several years,
• Population growth has created more demand for food products in general,
• Income growth has created more demand for processed foods, along with a desire for a wider variety of foods in the diet as well as more healthful diets,
• Individual countries� economies have become more stable than they were in the past and more friendly to both domestic entrepreneurs and foreign investments, and
• Regional trade agreements, like NAFTA (involving Canada, the United States, and Mexico) and MERCOSUR (involving Argentina, Brazil, Chile, Paraguay, and Uruguay), have encouraged investors.

Foreign direct investment for the most part has complemented U.S. exports rather than competed with them, chiefly because of the types of foods available in Western Hemisphere countries. Some products are too expensive to ship, and thus lend themselves primarily to domestic consumption: dairy products, wheat and corn flour, breakfast cereals, pet foods, livestock feeds, cookies and crackers, pasta, chocolate products, soft drinks, vegetable oils, and mayonnaise. Some prepared fruits and vegetables are produced in countries that are large fruit and vegetable producers, close to the raw product; these investments may be a source of U.S. imports: orange juice, frozen vegetables, and canned tomatoes, for example.

FDI seems to have beneficial effects on the economy of the host country, perhaps because it contributes to the country�s food production infrastructure. Processed foods can often be produced in the host country for less then the delivered cost of direct exports, while at the same time creating jobs, raising the gross domestic product, and producing products that can themselves be exported to earn foreign currency. Canada, Mexico, Brazil, and Argentina account for $9.9 billion (90 percent) of the $11 billion total of U.S. food companies� foreign direct investment in the Western Hemisphere.

Canada is one of the top markets for U.S. processed food, and income growth has been strong to promote consumer demand. Sales of U.S. affiliates of food processing companies in Canada account for about three times the level of direct U.S. exports to Canada. U.S. investments in Canada�s food industry more than doubled between 1985 and 1995. Sales from U.S. affiliates in Canada are concentrated in flour milling, soft drinks, and brewing, while major sales in exports are in meat products and frozen and canned foods.

U.S. investments in Mexico�s food industry rose from $0.4 billion in 1985 to $2.9 billion in 1995. Sales of U.S. affiliates of food processing companies in Mexico account for about three times the level of direct U.S. exports to Mexico. A debt-equity conversion program in the mid-1980�s and a reduction in inflation, along with prospects for joining NAFTA, encouraged foreign investment. Sales from U.S. affiliates in Mexico are spread throughout the food industry, with direct U.S. exports to Mexico concentrated in meatpacking, poultry, animal fats, soybean oil, wet corn milling, and dry/condensed milk.

U.S. investments in Brazil�s food industry tripled between 1985 and 1995. Sales of U.S. affiliates in Brazil were about 11 times the level of exports. Liberalization of Brazil�s investment laws, the recent stabilization of Brazil�s economy, and Brazil�s membership in the regional trade pact MERCOSUR created new interest in Brazilian investments. Sales from U.S. affiliates in Brazil are from cookies, biscuits, orange juice, soft drinks, canned and frozen fruits and vegetables, oilseeds and products, breakfast cereals, and beer. Sales from direct exports are concentrated in tallow and meat products, milled rice, hops, cheese, and nonfat dry milk.

Argentina has the highest per capita income in South America, with 30 percent of that spent on food. U.S. investment in Argentina�s food industry quadrupled between 1985 and 1995, encouraged by a government debt-equity program that helped to stabilize the economy and rein in inflation, special incentives to foreign investors, and Argentina�s membership in MERCOSUR. Sales of U.S. affiliates in Argentina were about 25 times the value of direct exports. Sales from U.S. affiliates in Argentina are chiefly in processed beef products, oilseed products, soft drinks, grain products, animal feeds, pet foods, ice cream, cream cheese, cookies, and crackers. U.S. export sales are concentrated in processed fruits and vegetables and beverages.

Foreign direct investment (FDI) is "the act of purchasing an asset and at the same time acquiring control of it." FDI includes investment by a company, group, or individual in new facilities, existing enterprises, a share of existing enterprises, or land or natural resources, located within another country. FDI is motivated by the desire to control or use the acquired assets, which is in contrast to passive control, embodied in portfolio investment. (Södersten and Reed, 1994, p. 501)

For statistical purposes, the U.S. Department of Commerce (Commerce Department) considers FDI as an investment of 10 percent or more in a foreign enterprise. An investment of this amount usually represents an attempt by the investor to gain some degree of influence or control over the decisionmaking of an enterprise. The Commerce Department reports FDI in terms of the stock of investment and the sales of the U.S.-owned affiliates resulting from FDI.

Portfolio investment is considered to be motivated by the potential return on investment and not by the desire to influence the management of the enterprise. Statistically, the Commerce Department classifies ownership of less than 10 percent as portfolio investment. Greenfield indicates the establishment of a new enterprise. Only 20 percent of foreign direct investment in the food industry is greenfield investment. Mergers and acquisitions are investments in already established businesses.

The processed food industry is defined here as the products listed in the U.S. Department of Commerce Standard Industrial Classification (SIC) Code 20 as "Food and Kindred Products." The SIC is the statistical classification underlying all establishment-based U.S. economic statistics that are classified by type of industry (OMB, 1987). It assigns establishments to industry groups based on their principal economic activity. Under the SIC system, establishments or plants that produce similar products, use similar processes, or provide similar services are assigned the same two-digit code number.

The 49 industries in the processed foods sector are known as "Food and Kindred Products" and fall into group SIC-20. SIC-20 includes establishments that manufacture or process foods and beverages for human consumption, as well as certain related products, such as chewing gum, fats and oils, and animal feeds. Products in SIC-20 must be value-added products, which do not always correspond to the more problematic "high-value products" designation. Fresh fruits and unshelled nuts are examples of high-value products that have undergone no processing and, hence, are excluded from SIC-20. Conversely, some "low-value" products are included in SIC-20, such as animal feeds and manufactured ice, because some processing had to take place to get the product to the customer.

Many processed food products serve as inputs into other manufactured foods and other goods, particularly those in the dairy products, grain mill products, and fats and oils categories. All of these items are included in SIC-20, whether the final destination is use as an intermediate product or consumption as a final good. In addition, many products are sold at a number of value-added levels. For example, beef sold "on the hoof" is listed as a raw commodity. However, as beef moves further downstream toward the consumer, it is always listed in the processed food category, whether it is sold as carcass beef (slaughter), as boxed beef (initial packaging), or as final cut (shrink-wrapped in the grocery display case).

Product mandate occurs when a conglomerate or multinational company decides that a specific product will be produced in a particular plant, and not in other similar plants, leading to specialization in production lines.

At the Summit of the Americas held in Miami in December 1994, all of the Western Hemisphere�s democratically elected leaders agreed to set up a Free Trade Area of the Americas by the year 2005. NAFTA and MERCOSUR, two important multilateral trade agreements, are important springboards to further current economic integration in the hemisphere. While many provisions of the agreements center on trade, other provisions are important for foreign direct investment.

Aside from important policy considerations, there are compelling economic reasons for analyzing trade and foreign direct investment (FDI) in the Western Hemisphere processed food industry. Canada is our second largest market for processed foods (after Japan) and Mexico is among the top 10, and both are among the top 10 destinations for U.S. foreign direct investment. Western Hemisphere trade and FDI opportunities for U.S. processed food companies have increased in recent years due to stronger economic growth. The size of the U.S. market has kept other Western Hemisphere markets somewhat in the background, but these countries have become more important to international food companies, partly because U.S. population growth and real income growth are lower than for the hemisphere as a whole.

Seeing stronger growth elsewhere in the Western Hemisphere, U.S. food companies, through a variety of strategies, have entered Western Hemisphere markets that are more open due to recent trade agreements and more stable due to institutional changes within countries. The main means of increasing international food business have been exports and FDI.

The purpose of this paper is to (1) explore trends in trade and investment in the Western Hemisphere processed food industry, (2) compile evidence of whether FDI and trade are substitutes or complements, and (3) present case studies of the attributes of selected Western Hemisphere countries that would favor FDI over trade. Part I of this report examines the factors driving demand for processed foods in the Western Hemisphere and the relative roles of domestic production, sales from U.S. affiliates, and U.S. processed food exports in fulfilling that demand in the 1990�s. This report also considers the economic scenarios that motivate trade and investment and assesses recent developments in light of NAFTA and MERCOSUR in the Western Hemisphere. Part II then explores four countries--Canada, Mexico, Brazil, and Argentina--that receive intensive treatment due to their size and market growth potential. These case studies illustrate how different country characteristics lead to different relative roles for trade and FDI in their food industries.

A plethora of issues surrounding foreign direct investment have been discussed for decades, each with its own economic literature. This paper deals with the question of whether foreign direct investment substitutes for trade and, secondly, the effect of FDI on the U.S. economy, particularly U.S. agriculture and the food processing industry. A closely related issue is the distribution of income to labor and the potential loss of jobs that is perceived as an outcome of outward foreign direct investment.

There are many facets in assessing the general effect of U.S. investment abroad, so this report is to be viewed in the broader context. The balance between inbound and outbound FDI finds U.S. direct investment abroad is nearly matched by foreign direct investment into the United States. Consequently, FDI in the food industry has more implications for the industry itself than for the U.S. macro-economy because direct investment in the food industry is only a small part of the total FDI in both directions. Moreover, direct investment represents about a fifth of the capital flows between the United States and the rest of the world, but it is the most visible. Portfolio investment in stocks and bonds is much larger. In that measure, the United States has been a net importer of capital since 1989 (U.S. Department of Commerce, Survey of Current Business).

FDI and trade in the real world cover many scenarios and mostly involve multinational enterprises (MNE�s) that have considerable market power. Specific cases include U.S. companies investing in foreign food processing companies that process U.S. agricultural products, investing to enter a foreign market, and investing to ensure an adequate product supply from imports.

There are many examples of U.S. companies investing in foreign companies that process U.S. agricultural products. As foods have become more highly processed, U.S. outbound FDI has led to increased exports of such intermediate products as meat and poultry, tomato sauce, and frozen french-fried potatoes to be used in frozen prepared dinners, pizzas, and fast food. As production of the finished processed food products increases, U.S. exports of intermediate processed foods may also increase.

U.S. outbound FDI also occurs because it may not be economically feasible to export particular products either because of high tariffs and/or transportation costs to certain countries. Dairy products, beer, soft drinks, and mayonnaise are examples. Even this FDI can lead to increased exports for such intermediate processed food products as malt and syrups and flavorings for soft drinks.

The flip side is that U.S. outbound FDI may also occur to ensure an adequate product supply through imports. Brazilian orange juice is an example where product prices are lower for U.S. consumers because of imports, even though the United States produces orange juice. FDI in companies that produce tropical products, frozen vegetables and canned tomatoes are other examples.

A major concern about FDI is that it shifts production abroad and becomes a substitute for U.S. exports. But,

contrary to this belief, data show both U.S. processed food exports and FDI have increased and some studies show that exports and FDI are often complementary. Income in most countries has grown sufficiently to support growth in affiliate sales and U.S. exports to satisfy strong demand for a wide variety of processed foods. (For a discussion of technical studies, see box.)

Growth is a persistent theme of this report--growth in Western Hemisphere incomes, populations, processed food trade, and FDI. One of the most consistently documented empirical findings in economics, Engel�s Law, states that poorer people spend a higher share of income on food; at higher levels of income, expenditures on food are larger, but less than proportionately larger (Deaton and Muellbauer, 1993). In the Western Hemisphere, incomes are growing, and total expenditure on food consumption is growing even as the share of income spent on food is falling. This report examines income levels and growth, especially in the most important FDI countries--Canada, Mexico, Argentina, and Brazil--to discern prospective changes in consumption of processed foods.

The United States has by far the largest annual GNP in the Western Hemisphere at over $6 trillion (fig. 1). The rest of the hemisphere has a combined GNP of over $2 trillion. Canada, Brazil, Mexico, and Argentina have the next largest economies. Strong population and income growth are leading to a faster increase in demand for processed food in the rest of the Western Hemisphere than in the United States and Canada.

The Western Hemisphere, excluding the United States, is a market of 550 million people, with Brazil (160 million) and Mexico (90 million) comprising the largest single-country markets (fig. 2). Approximately 10 million people are added to the market each year, with many countries of the region also undergoing rapid urbanization.

While population growth in the United States and Canada has stabilized, population growth is higher in Latin America (fig. 3). Venezuela and Mexico have the fastest growing populations of the region. While U.S. and Canadian populations are aging, populations in Latin America are relatively young. About 30-35 percent of the population is under the age of 15 in Argentina, Brazil, and Chile, and nearly 40 percent is in that age group in Mexico and Venezuela, compared with 21 percent in the United States and Canada (1990 census). In contrast, persons older than 64 years comprise less than 5 percent of the population in Argentina, Brazil, Chile, Mexico, and Venezuela, while they represent about 12 percent in the United States and Canada. More food is demanded on a per capita basis in Latin America because of the caloric requirements of a young population. Also, young people are more likely to purchase nontraditional types of food.

Income growth is the next most important factor driving demand for processed foods. The Western Hemisphere, in general, has growing economies. Latin America has had increasing real incomes since 1990. The purchasing power among the major Western Hemisphere countries (excluding the United States) is varied, ranging from about $1,300 per capita in Colombia to $20,000 in Canada (fig. 4). Outside of the United States, per capita income is the highest in Canada, Argentina, Mexico, and Chile. As the lower-income countries enter into an economic growth period, the marginal propensity to consume food is high, which means that income growth leads to increasing expenditures on food. Because the income elasticity for processed foods is generally higher than for staples, increases in income result in significant increases in use of processed foods (FAO, USDA). The Real Plan in Brazil (1994), the Convertibility Plan in Argentina (1991), MERCOSUR (1991), and NAFTA (1994) added to the potential growth and economic stability of the region (McClain, 1992).

The demand for processed foods in Western Hemisphere countries, as in most places, has been largely met by the domestic food industry, particularly in livestock slaughtering and canning fruits and vegetables. The United States, Canada, and Brazil have the largest food processing industries in the Western Hemisphere (table 1). The United States, Canada, and Argentina have the largest industries on a per capita basis. Many domestic firms have very modern equipment. These firms were often spurred to modernize when they faced competition from direct investment and trade. While the United States has the largest number of firms with sales in excess of $1 billion, some Canadian and Latin American firms have also joined the ranks of world class multinationals. (See country case studies in Part II for more details on the countries� food industries and firms.)

Given that there is a food processing industry in each of these countries, U.S. food processors have the alternative of either exporting processed food directly to them or entering into a variety of ownership relations through foreign direct investment. The United States is the second largest processed food exporter in the world after France (United Nations). At the same time, the United States is the principal home of many multinational food processing firms that invest abroad. Six of the 10 largest and 21 of the 50 largest food processing firms in the world are located in the United States. U.S. companies also enter into a variety of arrangements, including joint ventures and product licensing (Henderson, Handy, and Neff, 1996). Foreign ownership in the food industry is significant in most of the principal countries in the Western Hemisphere. Investments from abroad provided the capital, equipment, and expertise to supplement the domestic industry.

While trade in processed products has grown substantially in the 1990�s, most large U.S. food firms rely much more on foreign direct investment than trade to access international markets. U.S. direct investment in the Western Hemisphere�s food processing industries has nearly doubled since 1990, reaching $11.1 billion by December 31, 1995. Canada is the largest host country in the hemisphere, followed by Mexico, Brazil, and Argentina. The ranking is the same for both total direct investment and investment in the food processing industry (table 2). In nearly every major country of the Western Hemisphere, U.S. direct investment has taken a sharp upturn since 1988, exceeding the increases that would be attributable to inflation (fig. 5).

A major shift has also occurred in the type of investment. In earlier decades, most of the investment was for export products such as vegetable oil and orange juice. This continues in the 1990�s, but increased investment is geared to consumer products for use in the host country. Beer, soft drinks, cookies and crackers, and more highly processed foods, such as instant coffee, mayonnaise, canned soups, and breakfast cereals, are some of the products coming from U.S. foreign direct investment.

Large firms are the most likely companies to embark on foreign direct investment. CPC International, one of the largest food processing companies in the United States, is an example. CPC has perhaps the largest presence of

the U.S. food processing firms operating in other Western Hemisphere countries, and has been there for 65 years. CPC operates in every country in Latin America except Belize and Guyana, and its top markets are Brazil, Mexico, and Argentina. The company also has significant operations in Colombia, Chile, Venezuela, and Uruguay. Latin America accounted for a fifth of the company�s earnings in 1994. Between 1990 and 1994, the company�s consumer food sales and earnings compounded at 11 percent and 17 percent, respectively. CPC is the leading corn refiner in Latin America, with 68 percent of the market. The company also has leading regional market shares in bouillon, soup, mayonnaise, cornstarch, and corn oil. Other U.S. food processors with substantial operations in Latin America include PepsiCo, Nabisco, Coca-Cola, Kraft Foods, Cargill, and Archer Daniels Midland.

The affiliates of U.S. companies also operate side-by-side with European firms. European companies such as Unilever (the U.K.-Netherlands) and Nestlé (Switzerland) have wide business interests in Argentina and Brazil. Investments from abroad provided the capital, equipment, and expertise to supplement the domestic industry, so that foreign direct investment plays a very significant role in the food processing industry. Argentina has the largest share of foreign direct investment in its food industry (table 1).

The general improvement in the economic climate throughout the Western Hemisphere has been instrumental in promoting foreign direct investment. Many U.S. investors in the food industry see the Western Hemisphere as a growing market as country economies expand and consumers improve their diets.

Economic growth has brought increased demand for processed foods as consumers strive to improve their diets, particularly in Latin America. As a result, most domestically produced products stay in these countries to meet domestic demand. Economic growth has also brought investor confidence, particularly for long-term investments like FDI where there is a long-term planning horizon.

The liberalization of foreign direct investment rules has also been a strong force for growth in investment. Investment that was not legally possible a decade ago became possible in the 1990�s. NAFTA contains a number of provisions on foreign direct investment. NAFTA provides

Canadian, Mexican, and U.S. investors the right to third-party arbitration in investment-related disputes for nationals, governments, or state enterprises of the three countries. NAFTA also extends to Mexico the higher investment review thresholds ($154 million in 1994) provided to the United States in the FTA.

Other changes in Mexican law also contributed to the liberalization of the investment policy. As a result of the May 1989 "Regulations on Foreign Investment," foreign investors may establish new enterprises in Mexico and may hold up to a 100-percent stake in unrestricted economic activities, including food processing.

The Investment Canada Act of 1985 regulates foreign direct investment in Canada. Foreign investments are reviewed to determine the net benefit to Canada when direct acquisitions exceed $5 million Can. (US$3.5 million) and indirect acquisitions exceed $50 million Can. (US$35 million).

Argentina also liberalized its investment laws. The Argentine government eliminated registration requirements, gave foreign investors full access to local credit markets, required prior approval only in special cases (such as defense), and eliminated the waiting period for repatriation of profits and capital. Recent changes in Argentina�s investment laws were prompted by the transfer of public assets into subsequent investments in privatized enterprises. Decree Law 1853 of September 1993 governs foreign investment, combining the liberalizing measures contained in the Economic Emergency and State Reform Acts of 1989 and the Foreign Investment Law of 1993 into one piece of legislation. This law permits foreign companies to invest in Argentina without prior government approval and on equal footing with domestic firms.

Within the Western Hemisphere, the United States is a net importer of processed food, having exported $8.3 billion in 1995 (table 3, fig. 6) and imported $10.4 billion (table 4, fig. 7). The United States is a net importer of fruits and vegetables, sugar, beverages, and miscellaneous products, and a net exporter of dairy products, cereals, and vegetable oil (fig. 8). The Western Hemisphere has an important place in U.S. processed food trade; nearly 42 percent of U.S. food imports come from Western Hemisphere countries, and 28 percent of exports are bound for Western Hemisphere destinations. Canada is the second largest market for U.S. processed foods in the world after Japan, and the second largest source for U.S. imports.

Using the SIC industry codes to describe trade, U.S. processed foods trade in the hemisphere for the most part is dominated by different industries for exports than for imports. For exports, the largest industry group is Meat Products, followed closely by Grain Mill Products (SIC 204, which includes both milled food grains and feeds)

and Fats and Oils (SIC 207). All of these industries had exports of over $1 billion in 1995. On the import side, the largest group by far is Miscellaneous Foods (SIC 209, largely fish and seafood products), followed by Meat Products (SIC 201), Sugar and Confections (SIC 206), Preserved Fruits and Vegetables (SIC 203), and Beverages (SIC 208, which includes both soft drinks and alcoholic beverages).

Western Hemisphere food trade with the United States is also growing faster than U.S. global food exports and imports (table 3). Exports grew at an average annual rate of 17 percent between 1989 and 1995, compared to 11 percent for the world as a whole. Similarly, U.S. processed food imports from Western Hemisphere origins grew at an average annual rate of 6 percent between 1989 and 1995 versus 6 percent annual growth in global U.S. food imports (table 4). Canadian trade is the largest in the hemisphere (Canada has a mature industrial economy that performs similarly to the U.S. economy), but Mercosur trade has increased faster. There may be several reasons that account for the faster growth in Mercosur. These South American countries have much lower per capita incomes and are less industrialized than the United States and Canada and have a lower per capita use of most processed foods. They also have only recently

gone through rigorous structural economic adjustments and institutional reforms that have established a solid basis for sustained growth.

The most explosive growth in U.S. exports was from the Frozen Specialties industry (SIC 2038, which includes frozen prepared dinners and pizzas), which grew at a rate of 1,841 percent annually between 1989 and 1995 (table 5). Soft Drinks (SIC 2086) and Frozen Bakery Products (SIC 2053) grew by over 90 percent annually. Although beginning from low bases, very high percentage growth rates are observed in some industries� exports to Brazil and Argentina.

Annual growth rates in U.S. processed food imports are highest in the following industries: Ice Cream and Frozen Desserts (SIC 2024), Frozen Specialties (SIC 2038), and Cookies and Crackers (SIC 2052). Import growth rates are much more modest than export growth rates, with none topping annual growth of 17 percent (table 6). Canada and Mexico are the largest sources of U.S. import growth in these industries by a wide margin. The explosive growth in these products represents the strong demand for frozen products both in the United States and abroad that is outpacing demand in other food categories.

The general liberalization of trade has already made doing business easier throughout the hemisphere. Lowering tariffs has been the central issue of the Uruguay Round of GATT, the founding of Canada-U.S. Trade Agreement (CUSTA)/NAFTA, and customs unions such as MERCOSUR. The major developments affecting Canada�s trade regime are the CUSTA implemented in 1989, the NAFTA trade agreement implemented in 1994, the implementation of the Uruguay Round negotiations, and the establishment of the World Trade Organization in 1995. Canada�s import tariffs were generally low. Tariffs in the food, beverages, and tobacco sectors averaged 33.8 percent in 1996, compared with 7.8 percent in 1994, taking into account the tariffication of previous quantitative restrictions under the WTO Agreement on Agriculture. The agreement resulted in significant tariff peaks on above-quota supplies. The highest tariffs in the food industry apply to milk and cream, wheat gluten, pork and beef, poultry, ready-to-eat stews, sugar, molasses, and mayonnaise (General Agreement on Tariffs and Trade, 1995, World Trade Organization, Trade Policy Review, 1996). The highest tariffs are in the dairy sector. Because of the tariff rate quota enacted in NAFTA, effective tariffs on dairy and poultry products amount to 200-400 percent. Wines also carry heavy tariffs and taxes.

Brazil had import tariffs of 10 percent for agricultural products, 20 percent for beverages, 14.5 percent for processed foods, and 19 percent for tobacco in 1996. Specific tariffs were 16 percent for cereal preparations; 14 percent for canned fruits, vegetables, and juices; 10-12 percent for vegetables oils; and 10 percent for wheat flour. As a member of MERCOSUR, Argentina has similar import tariffs. Within MERCOSUR, tariffs for many food and agricultural products were zero, as of January 1, 1995, although there are many exceptions within the pact.

For Argentina, tariffs were higher for canned fruits, coffee and tea extracts, and confectioners� sugar than for items that are less processed. This is in sharp contrast to the recent past; for example, in 1966 Argentina�s average tariff for foodstuffs and beverages was 139 percent and Brazil�s tariffs were equally high. In a cross-country comparison made in 1992, Brazil had the highest tariffs on food and agricultural products (26.6 percent), followed by Canada, Argentina, the United States, and Mexico (Pacific Economic Cooperation Council, 1995).

The importance of foreign direct investment is demonstrated by the fact that sales from U.S. affiliates in Western Hemisphere countries exceed direct U.S. food exports and imports, just as they do globally. Globally, sales from U.S. affiliates are four times larger than U.S. exports of processed food (fig. 9). Similarly, for all of the Western Hemisphere, sales from U.S. affiliates are nearly 4 times exports (fig. 10). Canada and Mexico also are similar to the overall average in their ratios of affiliate sales to U.S. food exports. In contrast, Brazil and Argentina have very high ratios of U.S. affiliate sales to U.S. processed food exports. The sales/exports ratio are 12 and 37 times, respectively (table 7). In many cases, processed foods can be produced in a host country for less than the delivered cost of exports, particularly when the host country has many raw materials available from domestic production. As examples, Argentina and Brazil are both low-cost producers that compete with the United States in the international market for grain, oilseeds, and livestock. In other cases, FDI may be more suitable for matching consumer tastes, or may be a means of developing local distribution systems.

Sales of U.S. affiliates in Canada were at a ratio of 2.99 to processed exports to Canada (table 7). The largest sales from U.S. investments in Canada are from flour milling, soft drinks, and brewing. This is in contrast to U.S. exports of meat products and frozen and canned foods to Canada.

U.S. investment in Mexico exists in nearly every food processing sector. The largest U.S. exports are in meat packing, poultry slaughter, animal fats, soybean oil, wet corn milling, and dry/condensed milk, mostly as semi-finished products. Affiliate sales grew rapidly from 1989 to 1993, but leveled off in 1994. Sales declined in 1995 and rebounded in 1996.

U.S. processed food exports to Brazil include tallow and meat products, milled rice, hops and extracts, and cheese and nonfat dry milk. U.S. investment in Brazil is in cookies and biscuits, orange juice, soft drinks, canned and frozen fruits and vegetables, oilseed products, breakfast cereals and other grain products, and beer. Other countries have large investments in Brazil�s dairy industry.

U.S. exports to Argentina include processed fruits, vegetables, and beverages. Sales from U.S. affiliates are mostly processed beef products, oilseed products, soft drinks, grain products, animal feeds and pet foods, ice cream and cream cheese, and cookies and crackers. Affiliates of other countries sell dairy products.

Table 8 provides a survey of the products from foreign affiliates of U.S. companies in an attempt to pair U.S.

exports with the types of U.S. foreign direct investment enterprises. In the aggregate, both U.S. exports and FDI have grown, mostly due to the increase in the variety of foods that are made available to consumers. Some products are too expensive to ship and, thus, lend themselves to FDI. Dairy products, wheat and corn flour, breakfast cereals, pet foods, livestock feeds, cookies and crackers, pasta, chocolate products, soft drinks, vegetable oils, and mayonnaise are all products that benefit from FDI. Some prepared fruits and vegetables are produced close to the raw product source in countries that are large fruit and vegetable producers, and are a source of U.S. imports. Orange juice, frozen vegetables, and canned tomatoes are examples of these products.

Some products are both produced by U.S. affiliates and exported from the United States (exceeding $100 million). Cases include poultry products, pet foods, chocolate products, fruit and vegetable products in Canada and poultry products and vegetable oils in Mexico. Many more products are produced by foreign affiliates and imported in smaller amounts (soft drinks to Mexico and Canada, and livestock feeds and chocolate products to Mexico). At the other end of the spectrum, there are many processed food products that the United States exports without any affiliate sales, such as meat and meat products to Mexico. Most of these exports are less than $100 million and include distilled spirits (Argentina and Brazil), chewing gum (Argentina), livestock feeds (Brazil), roasted nuts (Argentina), and rice (Canada, Argentina, and Brazil).

Fresh and frozen fish are a special case where Canada and Mexico are net exporters, and they are both host countries for U.S. FDI. Canada also imports more than $100 million of fresh and frozen fish from the United States.

There is considerable discussion attached to the trade-off between FDI and processed food exports, although economists have studied the relationship between FDI and trade in all industries (Henneberry, 1997). In the case of FDI, earnings from capital are in the home country and earnings from labor are in the host country. In the case of exports, earnings from both capital and labor are in the exporting country, although the distinctions have become blurred in recent years.

Another comparison between FDI and international trade is based on the location of ancillary industries, whether in the United States or abroad. For example, as one industry moves into an area, others follow. The industry also creates demand for intermediate goods, demand that otherwise would not have existed. In the case of food processing, the presence of new plants defines the type of agriculture that is economically viable and, thus, the whole landscape of agriculture.

In other countries, there have been gains in efficiency because of increased competition from multinationals. Many manufacturers have begun to think in terms of regional markets, often consolidating plants to reduce costs and improve productivity. For the United States, direct investment abroad is nearly offset by inbound FDI, both in the food industry and all industry. Consequently, the United States looks at foreign direct investment from

both perspectives: as an exporter of capital and as a host country. Even though the landscape of U.S. agriculture has changed, farm earnings have steadily increased. Even some anticipated industry losses did not materialize as the industries reinvented themselves in the 1990�s.

Recent trends in the Western Hemisphere market indicate the importance of foreign income growth in driving expansion of U.S. food exports and creating greater opportunities for U.S. FDI and affiliate sales in processed foods. These developments have significance for the United States far beyond the food processing sector. Trends in processed food trade and investment have affected the farm sectors that provide raw inputs and the related industries that provide packaging, marketing, and other services. Developments in food processing industries also affect other agricultural sectors through changes in economic aggregates, including changes in demand for labor and investment capital and changes in the balance of trade and exchange rates.

An experiment using a computable general equilibrium (CGE) model provides guidance on important policy questions, such as the effect of increased investment in the Mexican economy on U.S. consumer prices, GDP, household incomes, wages, and foreign trade (Burfisher, Robinson, and Thierfelder, 1992). The experiment assumes that FDI will maintain its present relationship with total investment. Although the CGE model uses total investment, of which FDI is one part, the results can be considered indicative of the effects of Mexican inbound FDI on the U.S. and Mexican economies.

Increased investment is an important factor in making free trade agreements (FTA�s) successful in generating added real income and trade. FDI raises domestic supply, and income growth increases demand for both domestic and imported goods. Both of these ideas are demonstrated by the Burfisher-Robinson-Thierfelder CGE model and help explain why, in the aggregate, both affiliate sales and U.S. exports of processed foods have increased. An important finding is that there is a significant effect on U.S. trade with Mexico, but there is no significant effect on any of the other aggregate economic indicators for the United States.

The model results are generally consistent with actual events through 1995 and 1996. U.S. agricultural exports indeed recovered significantly in 1996, following the 1995 Mexican peso crisis, and so have U.S. exports of processed foods. U.S. imports of processed food and fresh fruits and winter vegetables (tomatoes) have also increased significantly (USDA, 1996).

An analysis of economic characteristics of the countries in this study provides insight into the reasons for the recent growth in U.S. direct investment in particular countries: Canada, Mexico, Brazil, and Argentina. A snapshot of the selected countries shows that the ratio of sales from affiliates to U.S. exports is smaller in Canada than in the other selected Western Hemisphere countries. Canada is the leading recipient of U.S. direct investment and the leading importer of U.S. processed foods. Moreover, Canada is unique among the four countries selected in that U.S. processed food exports have consistently increased in the 1990�s. This growth is an indication of the intertwining of the U.S. and Canadian economies, particularly along the border States and Provinces. Canada has had the largest absolute growth in two-way processed food trade and investment in the hemisphere. Two-way growth has also occurred between the United States and other developed countries in Europe. Canada�s proximity to the United States, its recent economic growth, and the decline in tariffs between the United States and Canada reinforce the already strong environment for bilateral trade and investment.

In contrast, Argentina has the smallest direct investment from the United States, mostly due to the smaller country size of Argentina in terms of population and income. On the other hand, U.S. investment in Argentina�s food processing industry is larger than in Mexico�s or Brazil�s when expressed in terms of per capita investment. Argentina and Brazil have the highest ratios of sales from affiliates to U.S. exports. These countries are essentially exporters of agricultural products, often producing the same products as the United States. Argentina and Brazil are also sufficiently distant from the United States so that higher transportation costs make exports less economically feasible than FDI. They have also experienced sufficient economic growth to generate consumer demand for processed food products and have achieved sufficient economic stability to entice investment from foreign companies. Foreign direct investment permits U.S. companies an opportunity to capture a market that they otherwise would not have.

The characteristics reviewed in table 7 correspond roughly with the list of characteristics that relate to global foreign direct investment in the food industry listed by Reed and Ning (1994)--economic growth, real interest rate differential between the host country and the United States, relative real exchange rates, GDP of the host country, relative wage levels between the United States and the host country, foreign income tax rate, and variables for membership in the European Union and being an English-speaking country.

Canada²

Canada is one of the top markets for U.S. processed food. Canadians spend about 10 percent of their incomes on food, and income growth has been strong to promote consumer demand (fig. 11). Canadian food purchasing habits are nearly the same as they are in the United States, where frozen and prepared foods are often the same brand names. Toronto (3.9 million), Montreal (3.1 million), and Vancouver (1.6 million) have fast-growing populations and account for 30 percent of Canada�s total population. The Canada-U.S. Free Trade Agreement (CUSTA, 1989) and the NAFTA (1994) have provided more opportunity for expanded consumption of processed foods in Canada by providing a wider variety of U.S. and Canadian products.

Demand for processed foods is expected to increase as the population changes in terms of demographics, ethnic diversity, income, and lifestyles. The increase in the number of working women and one-person households and an increased awareness of international foods have also accelerated demand for packaged foods, new value-added foods, and food preparations. For example, snack foods, such as potato chips and nachos, have gained in popularity.

Demand for basic foods has been fulfilled in Canada, and consumption of processed foods is high. Most food is purchased in supermarkets, 1,641 in 1993, which is about 1 supermarket per 20,000 people. This compares with the 24,600 supermarkets in the United States, which is about 1 supermarket per 11,000 people.

The food and beverage processing industry is one of Canada�s largest manufacturing sectors and is highly industrialized. The sector is now dominated by a small number of very large firms, a profound change in less than a decade. Many of the food processing subsectors have a considerable degree of concentration. The industry is structured as a core of 12 multinational firms representing about 35 percent of sales (8 of which are Canadian-owned), followed by 55 large firms with 25 percent of industry sales, and approximately 2,000 smaller firms with the remaining 40 percent of industry sales.

Some Canadian food processors are multinational companies that have expanded to the United States. Likewise, the United States is the largest foreign investor in Canada�s food industry, followed by the United Kingdom, the Netherlands, Switzerland, and Belgium. The market share of foreign-controlled firms has increased to 40 percent in the 1990�s.

The food processing industry is mostly concentrated in Ontario and Quebec (80 percent of the total), in close proximity to Canada�s population centers. Production is diversified in these two Provinces. Fruit and vegetable processing plays a big role in the economy of the Atlantic Provinces, and meat processing has been the most important value-added sector in the Prairie Provinces.

The Canadian food and beverage industry has been undergoing a period of intense restructuring and consolidation during the 1990�s. Since the implementation of the CUSTA, the Canadian food industry has expanded globally. North America is being treated as one region so that decisions are made on a north-south basis, rather than an east-west basis. Seagram�s and McCain Foods are the largest food and beverage companies in terms of sales (table 10). Plants are being organized across the continent to provide the lowest possible cost structure. New investment in technology is taking place among the medium and large firms. State-of-the-art food processing technology is present in the meat processing sector and the frozen food sector, particularly for frozen potatoes.

The food and beverage industry is one of Canada�s largest manufacturing sectors and is also highly industrialized. Meat products represented nearly 21 percent of processed food sales in 1996, with dairy products and feed totaling over 7 percent of sales each (table 11).

Meat products. The meat processing industry is Canada�s largest food processing industry. It is estimated that beef accounts for 40 percent of the product sales, followed by pork, and processed meat products, with 30 percent each.

The industry is increasing slaughtering capacity in the late 1990�s. Virtually all of this additional beef and veal will be exported, as consumption in Canada is expected to remain stable. Over 54 percent of the industry�s production is exported, mostly to the United States. Technology, particularly in chilling and producing value-added products, is improving. Boxed beef is being improved through trimming, aging, forming, and portioning. About a fourth of the beef output is further processed by other processors.

The beef industry is highly concentrated and has moved through an extended restructuring period. The top four plants account for 75 percent of the slaughter; two of the largest plants are U.S.-owned. Multinationals have increased the capacity of Alberta plants. Alberta now has over 60 percent of the Canadian federally inspected cattle slaughter, and Cargill and IBP together have 70 percent of that total. Maple Leaf Foods is the leading Canadian-owned company in meat processing, but it has joint ventures with U.S. companies. Increased cattle slaughtering capacity in Alberta in 1997 is fueling a shift to fewer cattle exports and increased Canadian beef exports.

The pork industry is less concentrated. The top 10 plants accounted for 63 percent of slaughter, and over 95 percent of all pork plants are domestically owned. The pork processing industry is also being upgraded in an attempt to bring presently small Canadian hog and pork operations up to a global size to be competitive at home and abroad. About 70 percent of pork is processed further into value-added cured or cooked products. Recent purchases of pork processing plants by Maple Leaf in western Canada and upgrades in Manitoba by J.M. Schneider, Ltd., are examples of the industry attempting to globalize. Nearly two-thirds of the pork industry is still in Montreal and

Quebec. Olymel of Quebec is the largest hog processor, followed by Maple Leaf Meats.

Poultry products. Canada has over 100 primary and further processing meat plants for poultry, including 65 federally inspected establishments. The subsector is entirely Canadian-owned and managed. The four largest poultry processors operate two or more plants in two or more Provinces and account for over 50 percent of production. Ontario and Quebec are the major producing regions, accounting for 66 percent of shipments and 61 percent of plants in 1995.

Dairy products. The dairy industry is second in size to the meat processing industry and is one of the most protected processing industries in Canada. Canada has 270 milk processing plants. About 79 percent of Canada�s dairy farms are in Ontario and Quebec. Milk production is largely from Holstein, Ayrshire, Jersey, and Brown Swiss cattle that are some of the highest milk producers in the world. There are two markets for milk in Canada. The fluid milk market, which is located mostly in Ontario, accounts for 38 percent of milk production. The industrial market accounts for 62 percent of milk production. Much of the industrial production is in Quebec (the largest producer of cheese, yogurt, and butter) and Ontario (the largest producer of ice cream).

Much of the development of Canadian dairy processing was through farmers� cooperatives. Coopérative Fédérée de Québec is Canada�s largest dairy cooperative. Dairyworld is Canada�s second largest cooperative and western Canada�s largest food manufacturer, with 21 processing plants across 6 Provinces.

Dairy processing has followed the same development process as most other food and beverage subsectors, with a trend toward fewer but larger plants operated by fewer companies. While the number of plants has declined by half since 1975, capital investment in state-of-the-art equipment has increased sharply. Ownership is highly concentrated, with foreign nationals becoming more prominent players. Two organizations have annual dairy product sales in excess of $1 billion.

Flour milling. The milling industry has undergone the closure of plants, reorganization through takeovers, and increased automation. The industry is highly concentrated, with two large U.S.-owned flour milling companies controlling about 75 percent of milling capacity. Since 1994, Canadian wheat milling capacity has declined 1 percent, while U.S. milling capacity increased 6 percent. Investment in buildings has declined since the late 1980�s, while investment in machinery and equipment has increased. The Canadian flour milling industry is concentrated regionally. Of the 39 mills in 1995, 70 percent are in Ontario and Quebec, 22 percent are in Prairie Provinces, and the remaining 8 percent are in British Columbia and Nova Scotia.

Canadian exports of flour, wheat gluten, starch, and pasta are increasing as Canadian wheat mills move into value-added products. Increased north-south and intrafirm trade have developed under the Canadian-U.S. Free Trade Agreement of 1989. Archer Daniels Midland is the largest milling company in Canada and is the only manufacturer of wheat gluten and wheat starch in Canada. Pasta manufacturing is also being reorganized along north-south lines as multinationals increase their intracompany trade.

Prepared flour mixes and cereals. This subsector is divided into two distinct industries: the prepared flour industry that manufactures cookie, cake, doughnut, pancake, and pastry flour mixes; and the breakfast cereal industry, the larger segment of the industry. This subsector is highly concentrated, with the top four firms accounting for 83 percent of total sales. The multinationals in this subsector operate on a North American product mandate basis, resulting in north/south product movement and considerable import/export activity.

Cookies and biscuits. The Canadian biscuit subsector has evolved from one composed of many independent companies to a subsector where ownership of all brands is concentrated in the hands of six or seven domestic or U.S. multinationals. The four largest manufacturers account for 76 percent of total shipments in Canada. While most plants are located in Ontario and Quebec, all of the major manufacturers have U.S. plants and operate continentally. The cookie subsector has restructured since the implementation of CUSTA. Large firms have been able to win product mandates, so that a product mix may be produced on either side of the border with considerable import/export activity.

Bread and bakery products. In 1995, there were 454 wholesale bakery establishments in Canada. The subsector is concentrated, with four firms controlling 52 percent of sales. Firms are located across the country, with their relative size and number being roughly proportional to the population. The subsector has undergone some restructuring since 1988, with the closing of smaller plants, the modernization of others, and the building of new plants. Developments in frozen dough technology have also led to the export potential of the industry. George Weston, Ltd., is the largest conglomerate in bakery products, with interests in both the United States and Canada. Maple Leaf Foods, Inc., is also expanding its frozen dough operations in the United States.

Canned and frozen fruits and vegetables. Canada has 159 canned fruit and vegetable establishments, including approximately 90 juice/drink plants. The major canning companies in Canada are subsidiaries of U.S. multinationals and are located close to agricultural production in central Canada and British Columbia. In response to competitive pressures, the number of canneries has declined.

The frozen fruit and vegetable industry is mostly Canadian-owned. The 35 frozen fruit and vegetable establishments are more export-oriented, are generally Canadian-owned, and are more concentrated in ownership. Many freezing plants operate on a scale comparable to nearby U.S. plants, with considerable new investment in new product lines.

Restructuring in both industries has meant that large establishments gained market share at the expense of medium-sized firms, particularly in the canning industry. Multinational subsidiaries will continue to compete for product mandates for the production of specific food products for the North American marketplace, often co-packing for other companies.

McCain Foods, Ltd., Canada�s largest frozen food company, has become a major producer of frozen french fries and other potato products. McCain has now expanded its frozen products to include meats. In Canada, McCain Foods, Cavendish Farms, and Midwest Foods, Inc. (Nestlé-Simplot joint venture), are the three largest french fry producers, followed by seven regional producers. Because of the demand generated by fast foods, potato production has grown in Manitoba to the extent that it is now the second largest producing region after Prince Edward Island. Also, most of the demand is by fast food restaurants in the United States, since U.S. imports of french fries from Canada are many times larger than U.S. exports to Canada.

Feed industry. The feed manufacturing industry has many producers, including Cargill, Ltd.- Nutrena Feeds. Most feed manufacturers are medium-sized operations. ConAgra plays an important part in grain storage in Saskatchewan because of its ties to value-added flour mills, malt plants, oat mills, barley mills, fuel plants, and further food processing.

Oilseed industry. Canola dominates western Canada�s oilseed industry, while soybeans dominate in Ontario. Canada is upgrading its canola crushing facilities to process 4 million tons annually. The Canadian Agra facility at Ste. Agathe, Manitoba; the Cargill facilities at Clavet, Saskachewan; the CanAmera facility at Harroby, Manitoba; and upgrades of two soybean plants in Ontario are the latest improvements in Canada�s oilseed processing industry.

Soft drinks. The soft drink subsector is concentrated, as the leading four enterprises controlled 78 percent of the market in 1992. The industry is unique in that a franchise system is controlled by large international brand owners. The soft drink industry mainly includes large foreign-owned multinationals, including U.S. firms. Others, including Cott Beverages, Inc., are smaller but Canadian-owned. In 1995, the subsector had 103 establishments, down from 170 in 1988 as a result of consolidation needed to achieve economies of scale. This high-volume, low-value product is produced regionally in Canada, near major markets, from imported concentrates.

Snack foods. Many of the snack food companies are subsidiaries of U.S. companies, such as Kraft. Others are wholly owned, such as Nalley�s Canada, Ltd., which began in the United States but later became a separate company.

Chewing gum and confectionery. Sugar and chocolate confectionery make up 77 percent of the sales of the 102 establishments that make up the industry. The leading eight confectionery enterprises produce close to 90 percent of the sales. The majority of the shipments are by foreign-controlled multinationals. Ontario and Quebec account for the bulk of the shipments. The confectionery subsector has adjusted to more liberalized trade through a series of acquisitions, mergers, and plant restructurings.

Product mandates are an important feature of trade among continentally based multinationals. Canadian confectioners benefit from low-priced world sugar as an input compared with their competitors in other industrialized countries, who have high tariffs to protect domestic sugar industries. Canadian manufacturers often import confectionery products to round out their product offerings in Canada.

Sugar. Canada�s sugar industry is dominated by two companies that operate five establishments: BC Sugar Refinery, Ltd., of Vancouver (which owns and operates three refineries in Canada and Canada�s only two sugar beet processing plants) and Redpath Sugars, a subsidiary of the UK�s Tate & Lyle PLC (which operates a leading and expanding cane refinery in Toronto, Ontario). Canada�s sugarbeet industry is located in the Prairie Provinces. It survives because of efficient production and processing techniques and the additional transportation costs that cane refiners would have to incur to compete locally.

Breweries. Beer is the Canadian alcoholic beverage of choice, and most beer is produced domestically. The brewing subsector is dominated by two major multinationals, which controlled 94 percent of the Canadian market in 1995. The balance of the market is supplied by microbreweries.

The largest company, Molson, was founded in the 1700�s and has eight breweries in seven Provinces. Molson allied itself (50/50) with Carling O�Keefe, owned by Fosters of Australia, in 1989, and allied itself with the Miller Brewing Company in 1993 to make Molson the sixth largest brewery in North America. Labatt is another large brewery that has entered into agreements with U.S. breweries to expand in the North American market.

The number of conventional breweries declined from 37 in 1988 to 25 in 1995. The decline is a result of the reorganization that occurred in the early 1990�s in response to more liberalized trade, changes in Provincial regulations that were the result of the Agreement on Internal Trade, and changes in international trade rules.

Wineries. The wine subsector is concentrated in Ontario, Quebec, and British Columbia. As a result of several mergers throughout the 1990�s, there are now two dominant national companies, with the top four enterprises controlling about 64 percent of production. The number of establishments decreased 15 percent from 1988 to 1995, and employment decreased 25 percent.

Distillery products. The distillery subsector has been declining since 1981. There were only 19 of 38 establishments left by 1994. Four multinationals, including one Canadian firm, control over 80 percent of shipments from the subsector. The bulk of the subsector is in Ontario (eight establishments) and Quebec (six establishments).

The CUSTA and NAFTA have spawned regionalization of the U.S. and Canadian food industries. Much of the investment has created a north-south, rather than an east-west, orientation between the United States and Canada in terms of trade and integration. U.S. investment in Canada�s food industry more than doubled between 1985 and 1995 (table 12). Foreign direct investment in Canada�s food and beverage industry is highest in the flour, soft drink, fruit and vegetable products, distilled beverages, and prepared cereal industries, where it represents well over half of the ownership. U.S. investment in Canadian food manufacturing is principally in grain milling and beverages (U.S. Department of Commerce, Bureau of Economic Analysis). U.S. companies, such as Cargill, have invested in Canada for decades. Canadian affiliates of U.S. companies had sales of $10.4 billion in 1995, and paid more than $1.6 billion in salaries in Canada. (An extensive list of U.S. affiliates in Canada�s food processing industry is presented in table 13.)

The United States has historically had a larger direct investment in Canada than Canada has had in the United States. Since the commencement of the Canada-U.S. Free Trade Agreement, Canadian direct investment in the United States has increased faster than vice-versa (tables 12 and 14). Canada�s investments in the U.S.

processed food industry have reached significant levels. Canada�s investment in the U.S. processed food industry hovered at $900 million in 1989-90, but an influx of Canadian capital in the early 1990�s put Canadian investment in the industry in excess of $5.9 billion. In 1995, U.S. food processing affiliates of Canadian companies had sales of $6.7 billion, double the level of 1987.

Seagram�s/Bronfman Family Foundation is the largest Canadian investor in the U.S. processed food industry, and their investments include wineries in California�s Napa Valley, canola processing plants in Idaho, and Tropicana orange juice processing facilities in Florida. McCain is a large Canadian vegetable processor with U.S. affiliates. Imasco, Ltd., owns Hardee�s fast-food restaurants in the United States.

Sales of U.S. affiliates were triple the level of U.S. processed exports to Canada in 1994 (fig. 12). The largest sales from U.S. investments in Canada are from flour milling, soft drinks, and brewing. This is in contrast to U.S. exports of meat products and frozen and canned foods to Canada (table 15). U.S. imports include meat products and frozen and prepared fish, some of which originate from affiliates of U.S. companies in Canada (table 16). Canada is also a large investor in the U.S. food industry, with sales from its investments mostly staying in the United States.

Mexico³

Mexicans spend about 35 percent of their incomes on food, making Mexico one of the largest markets for processed food from the United States. Upper- and upper-middle income consumers, who comprise 17 percent of the population, spend a far smaller share of their income on food but easily account for the greatest proportion of food spending in Mexico. While lower income Mexicans grow their own produce and buy many items at the local market or government shop, many urban consumers shop at modern national grocery chains. These urban consumers, particularly in Mexico City (population 23 million), are beginning to favor higher value products such as meat, milk, fruits, and vegetables over grains and beans.

Most domestically produced food products stay in Mexico. Eighty percent of Mexico�s horticultural production, for example, is for domestic use. The bulk of the products of the largest U.S. food processing firms that operate in Mexico also stay in Mexico. Per capita consumption of many processed foods starts at a low base, so most increases in income are translated to food consumption.

NAFTA and related reforms in Mexico�s economy set the stage for long-term economic growth, although Mexico suffered a setback in 1995 and early 1996. Mexico enjoyed real growth of nearly 20 percent between 1990 and 1994. Mexico�s real GDP declined by more than 6.5 percent in 1995, and recuperated by 3 percent in 1996 (fig. 13). These shocks to the economy carried over to retail food sales.

Mexico has about 680,000 foodstores that employ 1.16 million people. Most are small specialty stores that sell bread or tortillas, but Mexico also has modern national grocery chains, including Cifra, Grupo Gigante, and Comercial Mexicana; regional chains such as Soriana, Chedraui, and Casa Ley; and convenience stores such as Oxxo, Super 7, and 2+2 Serviplus. It is estimated that Mexican foodstores had sales of $18 billion in 1994. Local chains have 14 percent of the sales, compared with 19 percent for regional chains, and 67 percent for national chains.

Mexico�s $21 billion food processing industry is quite diversified, with modern technology being employed alongside antiquated methods. Some sectors of the industry, such as beer and wine and liquor, are concentrated, while other segments, such as dairy, are not concentrated at all.

The tortilla industry is Mexico�s largest processed food sector, followed by nonalcoholic beverages and the beer

industry (table 17). Cerveceria Modelo is Mexico�s largest food processing company, followed by Grupo Industrial Bimbo and FEMSA Cervesa (table 18).

Vegetable oils. The sector�s principal products are oils (mainly safflower and soybean), fats, margarine (22 percent of the value of total production), and soybean meal for livestock feed. Vegetable oils are also used for industrial products, such as paints, detergents, soaps, and industrial products. Most future growth in this sector will be in industrial uses of vegetable oils.

The industry has 181 companies and is relatively concentrated, with seven establishments controlling 50 percent of the market. The principal groups are AGYDSA-Patrona, Hidrogenadora Nacional, Anderson-Clayton, El Zapote-Aceitera La Junta, Industrias Regar SA, Grupo Industrial Aceitera, Oleaginosas del Sureste, and Productos de Mais y Arancia. Nearly 65 percent of the companies have modern equipment. Oil processing mills have a capacity of 300-400 tons a day, compared with 1,000-1,500 tons per day for U.S. mills.

Fruit and vegetable preparations. The industry produces a wide variety of products, primarily chili peppers, tomato puree, fruit nectars and juices, salsa, and frozen fruits. The industry includes more than 550 establishments that are distinct in their organizational structure, technology, and product mix. The industry is relatively concentrated, with the 30 largest companies controlling 90 percent of the sales. They include Herdez (13 percent of the market), Productos Del Monte (6 percent), Kraft Foods of Mexico (5 percent), Clemente Jacques (4 percent), Productos Del Fuerte, Jugos del Valle, Jugomex, Campbell�s de Mexico, Conservas La Catena, and McCormick de Mexico. The industry is concentrated in the States of Baja California, Sinaloa, Guanajuato, Veracruz, and the Federal District. Companies with obsolete technology coexist with companies that are totally modern. Equipment is from the United States, Germany, and Italy.

Mexico�s exports from the industry reached $207 million in 1994, of which $43 million were from orange juice and $21 million were from processed tomatoes. NAFTA trade liberalization has benefited these industries� trade prospects by lowering the tariffs that these products face when exported to the United States. Mexico also has 20 freezing plants for fruits and vegetables, with an effective capacity of 700 million tons. The industry is concentrated in the state of Guanajuato, in the Bajio region (Hinojosa-Ojeda, 1996). In the late 1970�s, large plants were built by Mexican growers, primarily La Huerta, COVEMEX, MarBran, and Productos Frugo.

Sugar. Mexico has 61 sugar mills located in 15 States, with 22 located in Veracruz. The principal producer groups are Escorpion (25 percent of the market), Machado (11 percent), Sucrum (11 percent), and Beta San Miguel (10 percent). The principal sugar cane producing areas are in Veracruz, Jalisco, San Luis Potosí, Oaxaca, Sinaloa, and Nayarit.

Coffee processing. This industry is composed of two distinct processors: companies that wash and ferment coffee beans, and roasters and grinders that remove hulls and grade beans. There are 2,000 companies that wash and ferment the coffee beans, 445 dryers, and 491 coffee roasters. There are three types of roaster companies: large companies, roasters that are integrated with the primary production, and small roasters. Large roasters

sell their production to supermarkets and stores. Of the 20 largest companies, only 6 make instant coffee: Nestlé, with 80 percent of the market, Combate, Marino, International, Domino, and Cafe Solubles Monterrey. Until 1989, INMECAFE had control of a large part of the production. The 48 producers attached to INMECAFE were transferred to the social sector (ejiditarios), and the organization became the Mexican Council of Coffee.

Dairy industry. Mexico has 108 pasteurizing plants; 1,390 plants that produce cream, cheese, and butter; 18 plants that make condensed, evaporated, and dried milk; 357 that bottle milk (in cartons); and more than 9,000 establishments that make ice cream. Dairy technology varies from traditional methods to the most modern.

The industry has little concentration in the pasteurization of milk and manufacture of ice cream, but high concentration in the production of condensed, dried, and evaporated milk, with an important presence of foreign capital. The principal companies of the sector are Nestlé, Chichota, and Tec-Lac.

Dairy production is found throughout Mexico, principally in the Federal District, Jalisco, Veracruz, and Chihuahua. Fluid milk comprises 47 percent of the sector�s value of production; cream, cheese, and butter, 23 percent; condensed and evaporated milk, 16 percent; ice cream, 7 percent; and other milk products, 6 percent.

CONASUPO plays an important role in the dairy industry as the sole importer of dried milk, which is reconstituted at its dairy LICONSA for the poorer segments of Mexico�s population. Most of Mexico�s milk production comes from a large number of small producers with low levels of technology and production, which increases the cost of the primary product (raw milk). The costs of milk production in Mexico are three times the costs of efficient producers such as New Zealand.

Milling and baking industry. The principal components are bread baking (70 percent of the value), pastas (17 percent), and wheat flour (13 percent). The breadbaking sector is comprised of 21,500 establishments that are concentrated according to the population. Bread is made both at small bakeries and in large companies. Bimbo, one of the largest food processing companies in Mexico, dominates the breadbaking industry.

The pasta sector is comprised of nearly 1,000 companies employing 31,000 workers. Large companies control 35 percent of pasta production, 65 percent of the cookie production, and 35 percent of the prepared flour production.

Meat industry. Mexico has over 3,000 slaughterhouses for beef and poultry, 500 plants that pack and freeze meat, and 700 companies that can meat. There are many small companies, but the modern part of the industry is relatively concentrated, with 27 establishments processing 50 percent of the slaughter and 9 packers processing 66 percent of the fresh beef. Only six large companies (including Sigma, Kir, and Zwanemberg) serve 60 percent of the market. Nuevo Leone and the Federal District are Mexico�s major beef processing areas. Jalisco, Mexico, and Michoacan are the principal pork slaughtering areas. The processing sector is 85 percent Mexican-owned. Grupo Alpro operates Mexico�s largest pork processing plant.

Tortilla industry. The tortilla industry is comprised of 11,000 small corn mills, and 3 large and 30,000 small companies that produce tortillas. The industry�s sales increased 2.4 percent in 1995 and were expected to increase 2.6 percent in 1996. During the past 15 years, technological processes have been developed to produce flour for tortillas on a large scale. The principal producers are Maseca (69 percent of the market), Minsa (25 percent), and Agroinsa (6 percent). The Government intervenes in the tortilla industry through consumer subsidies from CONASUPO. The price of a tortilla is N$1.10 (about 13 cents), with the subsidy, in the Federal District, while prices range from N$1.40 (about 15 cents) to N$1.70 (about 22 cents) in the rest of the country. (Note: N$ = new pesos).

Breweries. The Mexican beer industry is a duopoly--with Cerveceria Modelo and FEMSA Cerveza (Cerveceria Cuauhtemoc-Moctezuma) sharing a 54/46 split of the market. The companies have 14 breweries with an installed capacity of 15 million gallons. Breweries are fully integrated, from contracting the barley harvest to beer distribution. Both companies increased their plant capacity in Zacatecas and Ciudad Obregon in 1995. Cerveceria Modelo is allied with Anheuser-Busch and Cerveceria Cuauhtemoc-Moctezuma is allied with John Labatt Limited.

Beverages. In the beverage sector, there are 236 plants of diverse sizes: 22 large companies that produce more than 11 million cases; 63 medium-sized companies that produce 5-11 million cases; and 151 small companies that produce less than 5 million cases. In addition, there are more than 1,600 establishments that produce other types of nonalcoholic beverages.

Mexico has the largest per capita consumption of nonalcoholic beverages of all Western Hemisphere countries but the United States--24.4 cases/year in Mexico compared with 31.8 cases/year in the United States. The principal companies include Grupo Continental, Coca-Cola FEMSA, Argos, Grupo Embotelladoras Unidas, Grupo Embotellador de Mexico, Grupo AGA, Embotelladoras del Valle de Analhuac, and Grupo Azteca. These companies are franchises of multinational companies. Most bottlers also manage their own brands of soft drinks and mineral waters, but these are limited to local markets.

The industry is undergoing considerable restructuring and modernization. Some companies have acquired sugar mills and others, such as Consorcio AGA, work with plants that produce fruit concentrates. Most companies also have plants that make plastic bottles and other beverage containers and own transportation companies.

Wine and liquor industry. The wine and liquor industry has 487 establishments. The industry�s principal products are brandy and table wines (47 percent), rum (35 percent), and tequila (14 percent). The industry is highly concentrated in such companies as Bobadilla, Martel, Potosí, and Potrero.

The United States has also historically had a larger direct investment in Mexico than Mexico has had in the United States. U.S. direct investment in Mexico quadrupled between 1985 and 1995. U.S. capital flows to the Mexican food industry were especially high in 1993 and 1994 (table 19). The devaluation of the Mexican peso in 1995 temporarily slowed U.S. investment, even though a few industries that use Mexican raw materials and labor and export their products to the United States may have gained from the devaluation. Mexico in general began to receive increased flows of foreign direct investment after the mid-1980�s as a result of its successful debt-equity conversion program and a number of macroeconomic factors that led to reduced inflation and changed investors� perceptions of the country�s growth potential. Prior to the signing of the NAFTA, Mexico�s government changed its investment laws considerably to accommodate foreign direct investment.

Many U.S. food manufacturing companies, such as Campbell Soup, General Mills, Ralston Purina, and PepsiCo, have invested in Mexico for decades, while others, such as Tyson Foods and Sara Lee, are more recent entries into the Mexican market (table 20). A special arrangement between the United States and Mexico is the maquiladora system, which is more prevalent in Mexico�s clothing industry than in the food industry. Under the maquiladora system, Mexico imports inputs to produce value-added products that are, in turn, exported to the United States with special tariff benefits.

U.S. investment in Mexico�s food industry can be found in nearly all sectors, but mostly in candies, soft drinks, livestock feed, frozen fruits and vegetables, vegetable oils, and seafood processing. In 1995, Mexican affiliates of U.S. food processing companies had sales of $5.6 billion, and paid $807 million in salaries in Mexico.

Mexico�s investment in the U.S. food industry is very small and regional, totaling $79 million in 1994. Gruma and Bimbo, two of Mexico�s largest food processing companies, have invested in U.S. corn processing and tortilla facilities since 1994. In 1995, U.S. affiliates of Mexican companies had sales of $594 million and employed about 5,200 persons with compensation of $130 million.

Sales from affiliates of U.S. companies in Mexico are 2.5 times the level of U.S. processed food exports in Mexico. U.S. investment in Mexico is nearly across the whole food processing industry. The largest U.S. exports are in meat packing, poultry slaughter, animal fats, soybean oil, wet corn milling, and dry and condensed milk, mostly as semifinished products (table 21, fig. 14). Affiliate sales grew rapidly from 1989 to 1993, but leveled off in 1994. Preliminary indications are that sales declined in 1995, but not as steeply as U.S. exports. Exports (and probably sales) rebounded in 1996. U.S. processed food imports from Mexico are mostly seafood, beer, and processed fruits and vegetables (table 22). Some seafood originates from affiliates of U.S. companies.

Brazil⁴

Brazil is the third largest country in area in the Western Hemisphere, the fifth largest country in the world in terms of population, and the tenth largest economy. Average incomes in Brazil are modest, but Brazilians spend about 30 percent of their incomes on food. Brazil has also been able to overcome its economic problems of the 1980�s and early 1990�s (fig. 15). Brazil�s processed food market is an urban phenomenon. Brazil has 150 metropolitan areas with populations of over 100,000, and 10 cities with a population of over 1 million people. The metropolitan areas of São Paulo and Rio de Janeiro constitute a megalopolis of over 30 million people.

People are acquiring kitchen appliances such as microwaves, which has contributed to the growth in the use of frozen foods. The market for frozen foods until recently focused on chicken nuggets, hamburger patties, dairy products, and juices, and even then in small amounts compared with the United States.

Although a substantial proportion of unprocessed food is sold in open-air markets, most processed foods are sold in supermarkets and specialty stores. There is a growing trend to market processed foods through supermarkets. The 300 largest supermarket chains account for about 40,000 check-out counters, or half the total in the sector. Supermarket sales reached $35 billion in 1995, experiencing double-digit growth in the 1990�s. Industry concentration is low, with the 55 largest chains responsible for 50 percent of total sales. The major national chains are Carrefour (France, with 10 percent of the market), Pao de Açucar (Brazil, with 7 percent market share), and Makro (Netherlands). The States of São Paulo and Rio de Janeiro have 47 percent and 16 percent of the sales in the country.

Franchise food operations such as McDonald�s, Pizza Hut, Arby�s, and Dunkin� Donuts are planning to expand further in the next 5 years. Brazilian fast-food sales increased 50 percent to nearly $1 billion from 1993 to 1994. In Brazil, major franchisers accounted for approximately 1,000 stores.

Brazil has a well-developed food processing industry that provides consumers with a broad array of processed foods. Over half of the food consumed in Brazil is processed. The orange juice, biscuit, chocolate, candy, and dairy product industries have experienced the most growth in the 1990�s. Brazil has 43,000 food manufacturing and processing plants that provide 745,000 jobs. Large companies (over 500 employees) account for 19 percent of processed food production, medium-sized companies (100-499 employees) account for 43 percent, and small companies (fewer than 100 employees) account for 38 percent. For many years, the food processing industry was protected from foreign competition by limited access. This situation began to change in the 1990�s as deregulation of food prices by the government forced Brazilian companies to pay more attention to quality in order to compete with imports.

Brazil�s food processing industry, which is 36 percent foreign-owned, includes many U.S. companies and European-based multinational companies such as Nestlé, Parmalat, and Unilever. The estimated annual gross sales of Brazil�s food processing sector are $45 billion.

Meat products, fats and oils, dairy products, beverages, and sugar refining are the largest sectors in terms of gross sales (table 23). Production is mostly concentrated near large cities, particularly São Paulo.

Both Brazilian and multinational companies dominate individual sectors. Brazilian companies dominate the processing of meat products (particularly the poultry and pork subsectors), but multinational companies Nestlé and Parmalat dominate the dairy industry along with Brazilian dairy cooperatives. Brazilian companies produce most processed fruits (pineapples, peaches, and prunes) and citrus juice. Unilever�s affiliate Gessy Lever is Brazil�s leading producer of canned vegetables and tomato-based products. Most breakfast cereals are manufactured by Kellogg�s, while bakery, flour, and biscuits are divided among Brazilian and foreign companies. Nestlé, Cervejaria Brahma, and Antarctica Paulista are the largest food and beverage companies in terms of sales (table 24).

Wheat milling. The wheat milling industry in Brazil consists of 235 mills, 180 of which have daily capacities of 50 MT or less. Of the total installed capacity of 11.5 MMT, 20 of the mills produce more than 500 MT a day. Three main milling groups account for 46 percent of Brazil�s total milling activity. These larger plants are located near major population areas, while smaller mills are located near the wheat-producing areas. Weak demand stemming from recent economic adversity keeps the mills operating at less than 75 percent of capacity. Few large-scale manufacturers have automated production lines, and wide differences in technical capabilities exist among firms. For more than two decades, Brazil�s milling sector was under governmental control, where mills had a fixed quota to assure participation of all enterprises in the market, and flour prices were controlled by the state. In 1991, the entire wheat industry was privatized. New mill construction and renovation followed.

Santista Alimentos and Pena Branca Agroindustrial are two of the largest milling groups in Brazil. These mills have formed alliances with producers of pasta, cookies, and crackers, and with pizza franchisers--an important change in the industry. In the bakery industry, 95 percent of the activity is in small bakeries, and 5 percent is in industrial baking. Four companies dominate the industrial baking sector. Santista Alimentos and Panco are the major bread companies in a market where per capita consumption of bread averages 7 pounds per year. In the cookie and biscuit sector, family-run businesses, such as Confianca and Campineira, were incorporated by multinationals like Nestlé and Danone. Nabisco also has affiliates in Brazil. Production lines for cookies have diversified and modernized in the 1990�s. The cookie industry alone had sales of $1.5 billion in 1995. Brazilian production

of cookies and crackers totals 650,000 metric tons, equivalent to 9 pounds per capita.

Oilseed processing. The Brazilian oilseed market is controlled by the private sector with little government intervention. Market participants include producer cooperatives and national and multinational companies. Annual crush capacity is about 30 million tons. Most production processing capacity is located in southern Brazil, although several plants were recently built in the west-central and northern States. Soybeans make up over 80 percent of Brazil�s total oilseed crush. Paraná, Rio Grande do Sul, and São Paulo are the principal oilseed processing States. Large crushers in Brazil include Ceval Alimentos (13.2 percent), Cargill Agrícola (5.7 percent), and Incobrasa (4.3 percent). Other oilseed crushers include Sadia, Sambra/Samrig, Gessy Lever, Bianchini, and Olvepar. Brazil still lacks adequate storage and transportation facilities to efficiently move production into consumption and international markets.

Frozen concentrated orange juice. In São Paulo, 11 companies operating 17 factories produce frozen concentrated orange juice (FCOJ), processing about 97 percent of Brazil�s total capacity in a modern world-class industry. The two largest companies, Cutrale and Citrosuco, control about half of the processing capacity. Two medium-sized companies, the only foreign-owned companies, have about 30 percent of the capacity, and seven small companies account for the remaining 20 percent.

Most fruit for processing is purchased from independent growers, and about 15 percent is harvested from processor-owned groves. Bulk storage capacity, at the factories and in the ports, totals about 500,000 metric tons of concentrates, or about half of the annual output. About 75 percent of exports are shipped in bulk tanker ships owned by four of the processing companies. Companies not owning ships lease space from other firms.

Industrial plants were installed between 1963 and 1968, basically financed by U.S. and other foreign investors who incorporated relatively modern technology. Brazilian exporters have the most modern export infrastructure for orange juice of any place in the world. Brazilian exports of FCOJ are also dependent on consumer trends in Europe and Asia, Brazil�s biggest markets.

Cocoa beans. About 85 percent of Brazil�s cocoa production is concentrated in the northeastern State of Bahia. The remaining production comes from Espiríto Santo, São Paulo, Paraná, and Rondônia. About 50 percent of the cocoa crop is processed locally into intermediary products (mainly cocoa butter), and the processing industry is owned by large multinational cocoa dealers and chocolate manufacturers, such as Cargill.

Sugar. Brazil is among the world leaders in sugarcane, sugar, and ethanol (fuel alcohol) production and in sugar consumption and exports. It is also among the most efficient of all the major sugar producers, and Brazil�s sugar export products are the most diverse. Brazil can produce either sugar or ethanol from sugarcane, and only about 40 percent of its cane production is ground for sugar. Brazil has about 370 processing facilities to produce refined sugar and/or ethanol from sugarcane. About 25 produce only sugar, 145 produce only alcohol, and 200 produce both products. São Paulo is the major producing State, accounting for 60 percent of Brazil�s sugar output and about two-thirds of its alcohol output.

Wineries. Brazil is a moderate producer of wines and is in competition with its neighbors, Argentina and Chile. Grapes from the Rio Grande do Sul are used in white wines. Santa Catarina is also a wine district. More than 80 percent of the vineyards have less than 5 hectares and have difficulty competing with Argentina and Chile. The Aurora Coopérative (Marcus James) is responsible for nearly all of Brazil�s wine exports.

Beef processing. Brazil has a modern meat processing industry that consists of about 55 large meatpackers under federal inspection that meet the requirements of both the European Union and the United States (for processed meat only). There are also other small plants that only meet State and municipal sanitary requirements. Together, these inspected plants comprise about 60 percent of the total production. Most beef is trucked in carcass form up to 1,000 kilometers to be consumed. Only about 20 percent of the beef is packaged in ready-to-serve portions and sold in supermarkets. Most of the production is carried on by large national firms. There are only 2 multi-nationals, a decline from 5 in the early 1980�s. Sadia Oeste (Paraná), Swift-Armour (São Paulo), Fribrasa (São Paulo), and Frigorífico Kaiowa (São Paulo, Mato Grosso do Sul, and Minas Gerais) are the largest companies processing beef (Muller, 1996). The industry has basically expanded by larger companies� acquiring firms in the same subsector.

Poultry processing. Brazil has a poultry industry that is about a third the size of the U.S. industry and is active in the international market. Poultry production is a relatively important agricultural activity in Brazil. Originally, only family farm enterprises carried out poultry production, but large companies have now entered the industry. Brazilian poultry production technology is similar to U.S. technology. There are about 10 large private poultry processors in Brazil, mostly in the southern States, that comprise 70 percent of the Brazilian poultry market and account for 95 percent of the export market. Perdigao-Agroindustrial SA, Ceval Alimentos SA, Sadia Trading, and Frangosul are the largest poultry exporting companies, exporting both whole birds and pieces, mostly to Saudi Arabia and Japan. In poultry production, about 25 percent of the producers provide 90 percent of the broilers.

Dairy. The Brazilian dairy industry is dominated by two multinationals, Nestlé and Parmalat, and, to a lesser extent, by major Brazilian cooperatives and companies. Milk production is highly seasonal and is produced mostly in Minas Gerais, São Paulo, and Paraná. Brazil is a net importer of dairy products. During the off-season, it is common practice to extend fresh milk supplies by recombining fluid milk with domestic or imported nonfat dried milk. Fluid milk is marketed mostly through a network of large private national and multinational companies. Three types of milk are sold at retail, the most widely consumed being type C, with 3 percent fat content. It is sold in plastic bags and requires boiling before drinking. Types A and B account for only 10 percent of the fluid milk. Ultrahigh Temperature (UHT) milk is also consumed, due to the marketing efforts of the multinational Parmalat.

Corn products. Production is dominated by CPC International, a U.S. company. CPC produces grain-based cereals and dietary staples, mayonnaise, soups and bouillon, and corn oil.

U.S. investment in Brazil�s food industry tripled from 1985 to 1995 (table 25). Investments continued to increase into 1996. The liberalization of Brazil�s investment laws and the recent stabilization of Brazil�s economy from the Real Plan (1994) have created new opportunities for foreign direct investment. The concept of MERCOSUR as a regional market also renewed interest in investment in Brazil.

Borden, Cargill, Coca-Cola, CPC, Kellogg, Kraft Foods, PepsiCo, Philip Morris, and RJR Nabisco have a presence in Brazil. (A detailed list of companies is presented in table 26.) These companies have considerable market share in certain sectors and operate across a broad spectrum of products. CPC has its largest foreign affiliate in Brazil and is the largest producer of most corn products. RJR Nabisco is the second largest producer of cookies (7 percent of sales); and the leading producer of baking powder and yeast (80 percent of sales), dessert mixes (50 percent), and fruit juices (45 percent).

U.S. companies compete against such European conglomerates as Unilever, the second largest food company in Brazil with food sales of $1 billion. Unilever has operated in Brazil since 1929. Unilever is the top producer of edible fats and margarine, tomato-based products, canned vegetables, and cottonseed oil, and ranks second in specialty cheese and mayonnaise production and third in tea and soybean products.

Sales of affiliates of U.S. companies in Brazil are more than 12 times the level of U.S. processed food exports to Brazil (fig. 16). U.S. processed food exports to Brazil include distilled and blended liquors, malt beverages, bottled and canned soft drinks, animal and marine fats, and milled rice (table 27). U.S. investment is in cookies and biscuits, orange juice, soft drinks, canned and frozen fruits and vegetables, oilseed products, breakfast cereals and other grain products, and beer.

The most important U.S. processed food imports from Brazil include frozen fruits and vegetables (mostly juice), chocolate and cocoa products, prepared nuts, prepared fresh and frozen fish, and meat (table 28). Some orange juice imported by the United States originates from U.S. company affiliates.

Argentina⁵

Argentina has the highest per capita income in South America, and Argentines spend more than 30 percent of their incomes on food. The country�s largest city and capital, Buenos Aires, has a population of 11.8 million. Other major cities include Cordoba with 1.2 million and Rosario with 1 million. After nearly a decade of economic adversity due to inflation, Argentina began to open its economy and exercise fiscal and monetary discipline in 1989. The economy entered a new era of economic growth, low inflation, surging production, booming exports, and rising investments in the early 1990�s. Annual GDP growth exceeded 7 percent from 1991 to 1994, mostly because inflation slowed dramatically, from 4,924 percent in 1989 to 3.9 percent in 1994 (fig. 17).

Other changes include the removal of many taxes and an improved tax collection system, privatization of most state-owned enterprises, and deregulation of various sectors of the economy. The economy slowed in 1995, mostly because of the shocks of the Mexican peso crisis felt throughout Latin America.

Frozen dinners are still a rarity in supermarket freezers, and many Argentines prefer to buy prepared meals on their way home from work. Supermarkets and the food distribution system are just beginning to improve. Argentine businesses are beginning to improve refrigeration facilities, and retailers are beginning to carry large inventories of frozen and chilled products. Freezers and microwaves are now more common in middle-income homes.

Food retailing in Buenos Aires has undergone considerable change since 1990. A number of large shopping centers were built around the city, particularly in the middle- and high-income areas. Modern supermarkets and self-service stores (associated with gas stations) account for about half of total food sales; the rest is sold through traditional corner grocery stores. The number of supermarkets has grown threefold since 1975, and their share of sales has grown from 39 percent to 60 percent. Leading supermarkets include Carrefour, Norte, Coto, Disco, and Tia Express. Other store chains are Sumo, Americanos, Jumbo, and Metro. Wal-Mart has entered the Argentine market in a joint venture with Sumo by building several supercenters.

Fast foods are entrenched, but are at a low concentration relative to the population. McDonald�s (54 stores), Burger King (12 stores), Pumper Nic (a local hamburger chain with 60 stores), Pizza Hut (11 stores and home delivery), and Dunkin� Donuts are all represented in Argentina. There has been a significant increase in institutional consumption for many products, such as vegetable oil, that is driven by the fast-food industry.

The Argentine food industry, with $24 billion in sales (1993), employs 28 percent of the manufacturing workforce in its 22,000 establishments. While most establishments employ 2-5 people, 863 establishments employ 50 people or more (table 29).

Argentina�s largest food processing companies include Cargill, Molinos Rio de la Plata, and Sancor Coopérativas Unidas (table 30). About 40 percent of the sales of the Argentine food, beverage, and tobacco industries originate in Argentine affiliates of foreign firms (Agosin, 1995). For many years, Argentina�s problems with extreme inflation slowed development of Argentina�s food processing industry, with the major exception of the beef and oilseed processing industries. The domestic food processing industry was impeded by a low level of capitalization and high production costs. Years of economic uncertainty discouraged investment. Consolidation of the food industry is now underway, and many of the most important local brands have recently been acquired by multinational concerns. Moreover, the Argentine food industry is being viewed as an important part of the regional MERCOSUR market.

Cattle slaughter, dairy products, grain milling and baking, and vegetable oils account for 75 percent of product sales in Argentina�s food industry. Sugar refining and fruit and vegetable processing have lesser roles (table 29). Beef and oilseeds are highly oriented toward foreign trade, while sugar and dairy are oriented toward domestic use.

Beef. The beef processing industry is Argentina�s largest food processing industry and is internationally known in both beef packing and canned meat. Nearly 90 percent of the sales are from large processing firms. While Argentina has 635 slaughterhouses, only 288 are authorized by the National Animal Health Authority (SENASA)--135 bovine, 62 hog, 37 sheep, and 6 horse--but only 30 are approved for export to the United States. CEPA is the largest beef export packer, selling 18 percent of Argentina�s beef (in terms of value). The top three firms of the industry, Frigorífico Rioplatense, Quickfood, and Swift-Armour (a subsidiary of Campbell Soup), register about $200 million in annual sales each. Most are located in the Greater Buenos Aires area. Sixty-five percent of sales are through traditional butcher shops (about 25,000), although supermarkets have a growing share of retail sales.

Poultry. The poultry industry has annual sales of about $2 billion and employs 135,000 people. Argentine companies invested about $200 million in their poultry industry during the early 1990�s. The Argentine poultry industry has been dominated by traditional family-owned poultry firms and has only begun to adopt new technology. Argentine poultry imports from Brazil and tight availability of capital for the industry have caused Argentina to lag behind other countries, despite the abundance of feedstuffs. Most of Argentina�s commercial poultry industry is located in Entre Rios and Buenos Aires.

Oilseeds. Argentina�s oilseed industry is oriented to foreign trade, exporting nearly 90 percent of its products. Bunge y Born and Cargill (19 percent each), Vincentin (15 percent), Buyati, Dreyfus, and Moreno (12 percent each), Aceitera General Deheza (9 percent), and Continental (2 percent) are the market leaders. Argentina�s 59 oilseed processing plants have a capacity of about 13.5 million metric tons. There are also nine refineries for vegetable oil (capacity of 417 tons/day) and seven factories for hydrogenated products (capacity of 219 tons/day).

In the past, Argentina�s crushing industry paralleled the growth in oilseed production, but few new facilities were built until recently. There has been a trend toward consolidation. The number of plants has remained stable, but output capacity has grown by about 70 percent in the last decade. Most of the capacity is concentrated in about 20 of the largest plants. The oilseed industry has about 18 percent participation by multinationals. Cargill and La Plata Cereal have both made new investments in the 1990�s, and Ceval (Brazil) acquired Guipeba.

Sugar refining. Sugar production is mostly for domestic use, and the industry is concentrated in a few large refineries. There are 24 sugar plantations in the country, 15 of which are located in Tucumán. At the height of the season, the industry employs 60,000 people that are directly engaged in rural, administrative, and industrial activities.

Wheat milling. The wheat milling industry includes 111 milling firms with a capacity of more than 5.5 million tons a year. Thirteen firms are located in the Greater Buenos Aires area, and 20 each in Córdoba and Santa Fe. The largest mills are Molinos Rio de la Plata, Morixe Hermanos, Andres Lagomarsino, Har Bruning, Cabodi, Molinos Cañuelas, Fenixcor, Molinos Florencia, Molino Adelia Maria, and Concepción. Investments have been made to increase the milling capacity and to renew equipment to raise productivity and meet the stricter demands of large industrial firms that operate in the bread baking industry. Argentina also has well-developed breadbaking, spaghetti, and cracker manufacturing industries. Many foreign companies have invested in the production facilities of cereal-based products.

Cookies and crackers. Cookies and crackers constitute one of the smaller industries, but one of the fastest growing food processing sectors in Argentina. Transnational companies such as Danone (France), with its purchase of Bagley, and Nabisco, with a majority interest in Terabusi, have 60 percent of the Argentine cookie market. The cookie industry employs 13,000 people, but it operates at about 70 percent of capacity.

Dairy industry. The dairy industry is oriented toward domestic consumption, although about 11 percent of the industry is owned by transnational corporations. The industry has experienced considerable transformation, both by strong market concentration and diversity of products offered. Sancor Coopérativas Unidas (a cooperative), Mastellone Hermanos, and Nestlé are the largest firms and have about 40 percent of the sales. Nestlé, which also produces desserts and puddings, plays an important role in Argentina�s condensed milk and dried milk industries. Parmalat (Italy), Danone (France), and Loncoleche-La Suipachense (Chile) also process milk in Argentina. At least 10 companies have made considerable investment in expanding production of cheese, desserts and puddings, and yogurt.

Soft drinks. Three bottling companies control 91 percent of the domestic market: FEMSA, Coca-Cola; Buenos Aires Embotelladora, Pepsi; and the licensee of Seven-Up and Crush (the brand name run by Penaflor). Another 107 independent companies are spread throughout the country. All together, they employ some 9,000 people. In 1997, FEMSA, the second largest Coca-Cola franchiser in Latin America, bought 100 percent control of the franchise in Buenos Aires.

Wineries. Argentina has 1,890 wine cellars and 245 wineries employing 13,000 people. Five firms have 70 percent of production: Penaflor, Catena, Reserva, Giol, and Greco. Production is mainly centered in Mendoza and San Juan. Nearly 75 percent of domestic consumption is in Greater Buenos Aires.

Breweries. Brewing is a concentrated activity. Cerveceria y Maltería Quilmes, with its satellite Rio Paraná, is the largest brewery. The number of breweries grew to 13 in 1995 with the incorporation of Brahma, Compañía Cervecerias Unidas (formerly old Santa Fe brewery), and Cervecerias Argentinas SA (Isenbeck). Important foreign firms (Brahma of Brazil, Isenbeck of Germany, and Luksic of Chile) bought Compañía Industrial Cerveceria and are the driving force in the modernization of local breweries Quilmes and Bieckert.

Liquors. The industry includes 20 establishments, and Cusinier has 50 percent of the market after absorbing Padilla in 1994. Bagley, Bols, Cas Dellaplane, Cattorini, Cointreau Cusinier, and Distilerias Hiram Walker are some of the major Argentine distilleries.

U.S. direct investment quadrupled from 1985 to 1995 (table 31). There was an abrupt slowdown in direct investment inflows after 1982, coinciding with the regional debt crisis. Direct investment inflows accelerated after 1988, mainly as a result of the government�s debt-equity conversion program. The Convertibility Plan (1991) stabilized the economy and succeeded in reining in rampant inflation. U.S. investments have been mainly in cereal and oil processing (including corn oil), breweries, ice cream, cookies and biscuits, and popcorn. Cargill, CPC, Campbell Soup, Kellogg, Kraft, Nabisco, and Quaker Oats all have a presence in Argentina (table 32). Coca-Cola and Philip Morris have the largest sales (over $1 billion), followed by Cargill ($962 million).

Some companies have a large market share for certain products, for example, CPC has a 35 percent share of Argentina�s corn refining capacity. CPC�s Knorr brand is their largest business in Argentina, with a 90-percent share of the dried soup market. CPC also has 45 percent of the mayonnaise market. CPC�s sales have grown 30 percent per year in Argentina since 1990. Nabisco is ranked second in cookie production in Argentina and is the leader in dessert mix and pasta sales. Philip Morris/Kraft Foods has Tang, the leading drink mix in the region. Suchard, an affiliate of Philip Morris, is second in the chocolate confectionery market, and Philip Morris is second in the Argentine ice cream market.

U.S. direct investment comprises 32 percent of total FDI in Argentina�s processed food industry. Many Argentine firms have also sought joint ventures with investors from Canada, Mexico, and Europe: Parmalat (Italy), Danone (France), Bimbo (Mexico), McCain (Canada), and Cadbury (United Kingdom). The sharp increase in the 1990�s is mostly explained by special incentives to foreign investors, recent macroeconomic stability, and Argentine membership in MERCOSUR.

Sales of affiliates of U.S. companies in Argentina are more than 36 times the level of U.S. processed food exports to Argentina (fig. 18). U.S. exports to Argentina include flavoring extracts and syrups, processed fruits and vegetables, and malted beverages (table 33). Sales from U.S. affiliates are mostly processed beef products, oilseed products, soft drinks, grain products, animal feeds and pet foods, ice cream and cream cheese, and cookies and crackers. Affiliates of other countries sell mostly dairy products. Some processed beef imports are from U.S. companies� affiliates in Argentina, although canned fruits and vegetables are Argentina�s major processed food exports to the United States (table 34).

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1 | The updated version of this model incorporates recent policy changes in both countries, including NAFTA, and domestic farm policy reform in both countries.

2 | The material in this section is synthesized from a variety of sources, including FAS Online Food Market Overview, World Bank data, Journal of Commerce, Wall Street Journal, and Food Bureau, Agriculture and AgriFood Canada. Complete citations are given in the References.

3 | The material in this section is synthesized from a variety of sources, including FAS Online Food Market Overview, World Bank, Grupo Financiero SERFIN, Wall Street Journal, Journal of Commerce, and Sundue (Canada). Complete citations are given in the References.

4 | The material in this section is synthesized from a variety of sources, including FAS Online Food Market Overview, Fundação Getulio Vargas, Smith Barney, World Bank, Wall Street Journal, Journal of Commerce. Complete citations are given in the References.

5 | The material in this section is synthesized from a variety of sources, including FAS Online Food Market Overview, Fundacion Invertir, Tendencias Economicas y Financieres (Business Trends), Smith Barney, Wall Street Journal, and Journal of Commerce. Complete citations are given in the References.