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Mexico's Cartels and the Economics of Cocaine

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At Stratfor, we follow Mexico's criminal cartels closely. In fact, we are currently finishing our cartel forecast, which will be released later this month. As we analyze the Mexican cartels, we recognize that to understand their actions and the interactions between them, we need to acknowledge that at their core they are businesses and not politically motivated militant organizations. This means that although violence between and within the cartels grabs much of the spotlight, a careful analysis of the cartels must look beyond the violence to the business factors that drive their interests — and their bankrolls. There are several distinct business factors that have a profound impact on cartel behavior. One example is the growing and harvesting cycle of marijuana in the Sierra Madre Occidental. Another is the industrialization of methamphetamine production in Mexico and the increasing profit pool it has provided to the Mexican cartels in recent years. But when we are examining the transnational behavior of the Mexican cartels, the most important factor influencing that behavior is without a doubt the economics of the cocaine trade. Cocaine is derived from the leaves of the coca plant, and three countries — Colombia, Peru and Bolivia — account for all the coca harvested in the world. Turning coca into cocaine hydrochloride is a relatively simple three-step process. Once the leaves of the coca plant are harvested, they are rendered into what is known as coca paste. From there, the coca paste is processed into cocaine base, which eventually becomes cocaine hydrochloride. The process involves several precursor chemicals: kerosene, sulfuric acid, sodium carbonate, hydrochloric acid, potassium permanganate and acetone. Most of these chemicals are readily available and easily replaced or substituted, making them difficult for authorities to regulate. According to figures from the U. For the fresh leaf used in processing in Colombia, it takes somewhere between and kilograms of coca leaf to produce 1 kilogram of cocaine base, depending on the variety of coca plant used some varieties have a higher cocaine alkaloid content. One kilogram of cocaine base can then be converted into roughly one kilogram of cocaine hydrochloride, which is commonly referred to as cocaine. As cocaine progresses from the production site to the end users, it increases in value. But the price increases considerably once it leaves the production areas and is transported closer to consumption markets. Along the supply chain there is also quite a bit of 'cutting,' which is when substances are added to the cocaine to dilute its purity and stretch profit. According to the Colombian National Police, the purity of cocaine leaving the country is about 85 percent. By the time it reaches the United Kingdom, purity is 60 percent, and it drops further to about 30 percent at the retail level, according to the U. World Drug Report There has been a thriving two-way flow of contraband goods across the U. Mexican organized crime groups have been involved in the smuggling of marijuana to the U. These Mexican organized crime syndicates, such as the Guadalajara cartel , also began to traffic cocaine into the United States in the late s, but for many years the Mexican organizations worked as junior partners for the powerful Colombian cartels in Medellin and Cali. Mexico was a secondary route for cocaine compared to the primary route through the Caribbean. As a result, the Colombians pocketed the lion's share of the profit made on cocaine trafficked through Mexico and the Mexicans received a fee on each kilogram they transported. However, they did not assume any of the risk of losing shipments between South America and Mexico. In the late s and the s — the early phase of Mexican involvement in the cocaine trade — Central American middlemen such as Juan Matta-Ballesteros were also heavily involved in the flow of cocaine through Mexico. They moved cocaine from South America to Mexico, becoming wealthy and powerful as a result of the profits they made. It is far more difficult to spot and seize contraband moving across the busy U. This increase in the importance of Mexico allowed the Mexican cartels to gain leverage in negotiations with their Central American and Colombian partners and to secure a larger share of the profit. Indeed, by the mids the increasing importance of Mexican organizations to the flow of cocaine to the United States allowed the Mexican cartels to become the senior partners in the business relationship. In a quest for an even larger portion of the cocaine profit chain, the Mexican cartels have increased their activities in Central and South America over the last two decades. The Mexicans have cut out many of the middlemen in Central America who used to transport cocaine from South America to Mexico and sell it to the Mexican cartels. Their efforts to consolidate their control over Central American smuggling routes continue today. This move meant that the Mexican cartels assumed responsibility for the losses incurred by transporting cocaine from South America to Mexico, but it also permitted them to reap an increasing portion of the profit pool. But the expansion of the Mexican cartels did not stop in Central America. According to South American authorities, the Mexican cartels are now becoming more involved in the processing of cocaine from coca leaf in Colombia, Peru and Bolivia. There have also been reports of seizures of coca paste being smuggled to cocaine processing laboratories in Honduras and Guatemala. The use of these Central American processing laboratories, which are run by Mexican cartels, appears to be a reaction to the increased efforts of the Colombian National Police to crack down on cocaine laboratories and the availability of cocaine processing chemicals. But the efforts of the Mexican cartels to increase their share of the cocaine profit are not confined to the production side; they have also expanded their involvement in the smuggling of South American cocaine to Europe and Australia and have established a footprint in African, Asian and European countries. Furthermore, they have stepped up their activities in places like the Dominican Republic and Haiti in an attempt to increase their share of the cocaine being smuggled through the Caribbean to the U. As seen by recent operations launched by U. While marijuana sales have always been an important financial source for the Mexican cartels, the large profits from the cocaine trade are what have permitted the cartels to become as powerful as they are today. The billions of dollars of profit to be had from the cocaine trade have not only motivated much of the Mexican cartels' global expansion but have also financed it. Cocaine profits allow the Mexican cartels to buy boats and planes, hire smugglers and assassins 'sicarios' and bribe government officials. Cocaine is a product that has a very limited and specific growing area. Consequently, that distinct coca growing area and the transportation corridors stretching between the growing area and the end markets are critically important. With a business model of selling cocaine at over 10 times the cost of acquisition — and even greater over the cost of production — it is not surprising that the competition among the various Mexican cartels for the smuggling corridors through Mexico to the United States has become quite aggressive. This account already exists, you can try logging on with this email. You may unsubscribe at anytime. Having trouble signing in? Contact Customer Service. Already a subscriber and need help getting access? Special limited time offer to qualified returning subscribers. As we continue to work to improve the Worldview experience, we'd love to know a little more about you:. What is your primary use of Worldview analysis? Profile Notifications Sign Out. The Cocaine Profit Chain Cocaine is derived from the leaves of the coca plant, and three countries — Colombia, Peru and Bolivia — account for all the coca harvested in the world. Cocaine Value Chain map. 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