January 30, 2017 - posted by Rachel Bonello
Ordering a bottle of Corona beer at a bar in the United States is a simple proposition.
Getting it there from its brewery in Mexico involves a complex, cross-border supply network that will likely get more complicated if U.S. president Donald Trump follows through on vows to renegotiate the North American Free Trade Agreement (NAFTA) or tax imports.
Trump has not outlined specific plans for revising NAFTA, but he has made repeated calls for a levy to discourage companies from moving jobs outside the United States. On Thursday, the White House floated a plan to impose a 20 percent tax on imports. Republican leaders in the U.S. House of Representatives have included a tax on imports in their blueprint for overhauling corporate taxes.
The ideas have met opposition in Congress, even inside Trump’s own party. U.S. Senator Lindsey Graham, a republican from South Carolina, took to Twitter on Thursday, saying “Simply put, any policy proposal which drives up costs of Corona, tequila, or margaritas is a big-time bad idea. Mucho Sad.”
Trump’s rhetoric has also heightened uncertainty over the billions in supply chain and infrastructure investment that a diverse array of companies from automakers and railroads to appliance makers and food producers have made on both side of the U.S.-Mexico border during the past two decades.
The stakes are high for brands like Corona, which is entirely brewed in Mexico, and the transport companies such as Union Pacific Corp (UNP.N) that make money moving the beer’s raw ingredients and packaging into Mexico, and bringing the finished brew back to the United States.
Victor, New York-based Constellation Brands Inc (STZ.N), which owns the U.S. rights to Corona, plans to spend $2.5 billion to expand an existing brewery in Nava, just south of the border with Texas and $2 billion on a new brewery in Mexicali by 2021.
Just days before the November 8 U.S. election, the company said it would buy a Mexican brewery from Grupo Modelo for $600 million and expand its operations in the country.
To qualify as a Mexican beer, Constellation’s beer brands must be made in Mexico. However, about 40 percent of the cost of the company’s Mexican beers are tied to ingredients, supplies and freight services that come from the United States, said David Klein, Constellation’s chief financial officer during a conference call earlier this month.
The company – which has seen its market valuation triple to nearly $30 billion since 2013 when it obtained rights to sell Corona and other Mexican beer brands – imports hops, barley and other grains from the United States to brew Corona. The company does not disclose the specific origin of ingredients.
“The majority of our glass bottle supply comes from the glass plant at the Nava brewery and other Mexico suppliers. We source less than 20 percent of our glass bottles from the United States. Some raw materials, including hops and grains to brew the beer, do come from the United States,” Constellation said in a statement.
Farms in the Midwestern and Northwestern United States are major growers of barley in North America, and in 2015 Mexico was the world’s largest importer of U.S. barley. Since 2010, Mexico has been either the world’s largest importer of U.S. hops or second just behind the United Kingdom.
Unraveling the NAFTA supply chains of companies such as Constellation, or the big automakers, would lead to higher prices for consumer goods, experts and industry executives say.
“Everyone would lose, especially the consumer, it’s that simple,” said Brandon Stallard, CEO of Troy, Michigan-based TPS Logistics, which handles tens of thousands of cross-border shipments for customers daily.
U.S. companies also benefit from Corona production. Perrysburg, Ohio-based glass maker Owens-Illinois (OI.N) formed a joint venture with Constellation to expand a glass bottle plant next to the Nava brewery and subsequently bought a major Mexican glass bottle producer to meet demand. Owens-Illinois declined to comment on where its raw materials come from.
Broomfield, Colorado-based Ball Corp (BLL.N) has built a plant in Monterrey to make cans for Constellation’s new brewery.
Constellation says it imports almost 20 percent of its glass bottles from the United States. The company did not say where those bottles come from, but Lance Fritz, chief executive of No. 1 U.S. railroad Union Pacific often cites the example of glass bottles the company hauls from a plant in Texas to a brewery in Mexico and that those bottles are made from recycled glass Union Pacific hauls from all over America.
The railroad has also invested $40 million in cleaning, washing and repair facility for beer-carrying box-cars just north of Constellation’s Nava brewery. Union Pacific hauls U.S. barley, malt and rice for brewing.
“The job we have at hand is to help our elected officials see the world from our perspective and then pray for them to make the right decision,” said Fritz.
By: Nick Carey
To read the full story, visit Reuters.