Why Mexican Cartels Want In on the Food Business

Without a doubt, bartenders will remember the year that a box of limes shot from $40 to a peak of $139. To stay in the green, bars cut limes into paper-thin wedges, switched to lemons, or offered 25-cent margaritas in exchange for a bag of limes.

In one of the weirder supply-chain takeovers in recent memory, the Knights Templar cartel of the Mexican state of Michoacán was largely responsible for the ballooning cost of this citrus staple. Supply was already low for the year—a blight called Huanglongbing wreaked havoc in Colima and heavy, unseasonable rains broke flowering buds off lime trees in Michoacán, Guerrero, and Veracruz. Knowing an exploitable situation when they saw one, The Knights Templar began knocking over truck shipments headed to the United States, where about 98 percent of limes are imported from Mexico. Lime companies hired armed guards to accompany their cash crops, and the cost was forwarded to American consumers.

The 2014 lime shortage was the most high-profile instance of cartels hijacking a food market, but the practice has occurred for years. From Zeta-brand whiskey in Northern Mexico to The Knights Templar's "blood avocados" and the Cartel de los Quesos in El Salvador, cartels look to cash crops and packaged goods as a revenue stream that resembles their own: mass-consumed products heading toward consumer markets.

From 2010 to 2013—at the height of Mexico's drug violence—Tom Wainwright followed the odd and brutal world of cartels as The Economist's Mexican business correspondent. In his new book Narconomics, the journalist explores how cartel policies often mirror those above-board companies. Cartels buying coca in Bolivia look remarkably like Wal-Mart, creating monopsonies and forcing their suppliers to eat losses to keep prices down for the consumer. The Zeta cartel looks to promising entrepreneurs to open up local franchises of their brand. If it weren't for the stomach-churning violence, it'd be easy to confuse a cartel's business model for that of a Fortune 500 company.

I recently caught up with Wainwright to discuss Narconomics, edibles, Tony Soprano, and why cartels will continue to get their hands on food.

MUNCHIES: Hi, Tom. Why do cartels see foods like avocados and limes as strong options for diversification? Tom Wainwright: They want to spread their risk, like any other big business … Getting into totally different industries means that they spread their risk further still. Avocados, limes, and bootleg alcohol fill this role. So do other lines of business, like pirated DVDs and even oil. (Pemex, Mexico's state-run oil giant, says it loses about $1 billion worth of oil a year to theft.) The downside to diversification, as with regular companies, is that cartels find themselves working in industries they don't have expertise in. That's not necessarily a big problem in the avocado business, but in oil it can be a problem, as seen by the number of people who blow themselves up each year trying to tap Pemex's oil pipes.

How and when did the Knights Templar get involved in taxing and growing avocados? The Knights Templar was really only formed in 2010, following the supposed death of Nazario Moreno González, the leader of La Familia Michoacana, another cartel from the same state. My guess is that La Familia had already been involved in taxing the avocado business for many years. In most cases, it's not a question of cartels actually growing and marketing the products themselves—more a matter of them seeing avocados as a successful local business that is ripe for extortion. A trend we've seen in recent years, with cartels like the Zetas and also the Knights Templar, is that they're moving away from the traditional drug-transportation business and toward a business model which is all about controlling territory and running all of the criminal rackets in the area, from drugs to extortion and kidnapping. The Templars would happily tax or extort anything that moved. It just so happens that two of the big businesses in their home state, Michoacán, are avocados and limes.

On Fresh Air, you mentioned that the Zetas have a label of "Z-branded" whiskey in Northern Mexico. I'm afraid I haven't tried it. I was told this by a public security official in Monterrey, a city where the Zetas had been fighting a long and bloody turf war with a rival cartel. Bars in the area had supposedly been told to stock the stuff or face the consequences. This was in 2010; I don't know how long they had been doing it at the time, but I guess not long, because the Zetas really only came of age as a cartel around that time. Their reasons for getting into it are the same as the reasons for getting into many other illegal businesses: As soon as the state bans or taxes something, a black market emerges to supply it. Drugs are the most obvious example. But highly taxed products, such as cigarettes and alcohol, generate black markets too, since there is money to be made in selling the stuff under the counter, without paying taxes. The World Health Organization estimates that, worldwide, perhaps one tenth of cigarettes and one quarter of alcohol is illicit. The higher something is taxed, the greater the incentives for providing it illegally. I suspect that the Z-whiskey is made in a legitimate factory and then either stolen or bought wholesale by the Zetas, before being rebranded and sold untaxed.

Could you elaborate a bit on the Cartel de los Quesos? It doesn't sound especially scary, does it? It existed for the same reasons that people smuggle alcohol and cigarettes. In El Salvador, cheese from next-door Honduras was banned, supposedly for health reasons (the Hondurans were said to be not pasteurizing their milk) but perhaps actually in order to protect Salvadoran dairy farmers. Either way, it meant that there was a gap in the market for criminals to import the stuff. It makes some economic sense: Compared with most food products, cheese has a long shelf life and pretty high value-to-weight ratio, making it better suited to smuggling than many other things. These days, I think the two countries are part of a free-trade area, so the cheese cartel has been put out of business (or at least has had to look for other lines of contraband).

I think one of the reasons people are attracted to stories about the cartels is their absurdity of it all—El Chapo's tunnels, lime cartels, etc. When writing about operations like the Cartel de Los Quesos, is it hard to remember that these are brutal and unforgiving criminals? Yes, one of the points I try to make in the book is that we tend to talk about these guys in a slightly jokey way, when in fact they are utter scumbags. All the stuff about gold-plated machine guns and pet tigers is hilarious, of course. But these are also people who carry out mass murder and torture as part of their business model. I don't want to put your readers off their food, but cartels in Mexico behead their victims, skin them, burn them alive, kidnap their children, and send them back limb by limb … it is sickening. People in the US and Europe who buy their products ought to know that when they spend $100 on a gram of cocaine that is what they are paying for. I'm on the side of those who think that legalizing the lot would be the least-bad option. But as long as it remains illegal, and therefore in the hands of organized crime, buying cocaine is no better than sending a donation to ISIS. And don't think there's any possibility that your stuff is the "fair trade" variety. All the world's cocaine is managed by cartels that do this stuff. If you've ever bought coke, I'm afraid it's a certainty that you've contributed to the cost of someone dying a slow death in some basement in Mexico.

What is the cartels' relationship to the edibles market in the US?I think the marijuana edibles market represents a big problem for the cartels, actually. In fact, the whole legal marijuana phenomenon does. The evidence in places like Colorado is that the cartels can't compete with the legal market. In Colorado, the authorities reckon that the legal businesses satisfy about 70 percent of estimated demand (and much of the remaining 30 percent is the "gray" market of people legally growing the stuff at home and covertly selling it). Edibles are a relatively tricky, sophisticated market to get into, and so far there is no sign of any cartel even trying it. They specialise in smuggling cheap, poor-quality stuff. In Colorado, the big growth areas are the edibles (and drinkables) and the concentrates. Again, concentrates is something the illegal market has never has much luck in producing, partly because it requires relatively sophisticated technology to produce safely. In terms of marijuana in the US, the cartels are being outcompeted by legal firms in price, quality, and variety. It's the single biggest threat they face.

You say that cartels act as monopsonies, forcing coca leaf farmers to eat costs instead of raising prices for consumers. How have government initiatives to encourage farming of edible cash crops altered the supply of raw coca? Not a great deal. There are projects under way to get coca farmers into other industries, like coffee or tomatoes or chickens or all kinds of other stuff. (Similar stuff happens in Afghanistan, trying to get opium poppy farmers to grow other stuff, though I confess I don't know much about that.) Some of them have had some success—it deprives the cartels of some of their power if farmers have other options than coca. But the trouble is that the profits involved in cocaine are so vast that even if cartels do have to increase the price they offer for coca, it does almost nothing to the end price of cocaine. The coca needed to make a kilo of cocaine costs about $500 in Colombia. That pure kilo sells in the US for more like $150,000. So even if you double the cost of that coca, and even if that whole extra cost is passed on to the consumer, it only raises the price of the coke to $150,500. (Or of a pure gram from $150 to $150.50). Not a great return, really.

If another lime shortage occurs, could we expect a cartel to hijack the industry and further raise prices? Not necessarily. I suppose if the shortage were localized, leaving just a handful of places with a bigger-than-usual share of the market, that might increase incentives for a cartel to seize control of farms in those areas and reap the monopoly rewards.

Thanks for speaking with me.