UPDATE 2-Mexico looks to Europe after slapping tariffs on U.S. pork

(Adds comments from government official)

MEXICO CITY, June 5 (Reuters) - Mexico will import more pork products from Europe after imposing a 20 percent tariff on U.S. pork legs and shoulders in retaliation to steel tariffs, Economy Minister Ildefonso Guajardo said on Tuesday.

About 90 percent of Mexico’s $1.07 billion annual imports of pork legs and shoulders come from U.S. suppliers and the country expects to import more from elsewhere to avoid pushing prices higher for the cuts used to make hams and other processed meats.

After U.S. President Donald Trump imposed steel and aluminum tariffs on its NAFTA trading partners, Mexico on Tuesday retaliated against pork, steel and products ranging from light fittings to bourbon.

The countermeasures could hurt farmers and industry in states that supported Trump in 2016 ahead of mid-term elections in November. Chicago Mercantile Exchange hog futures deferred trading months at one point fell more than 2 percent following the Mexico pork tariff news.

At the same time as imposing the tariff on U.S. pork, Mexico opened a 350,000-tonne quota for imports of the meat from other countries. Guajardo said that quota would cover demand for the rest of the year.

“It will surely come from Europe, from some European countries. The idea is to avoid an impact on the supply chain for processed meats so there is not an impact on the consumer,” he said at an event in Mexico City.

Bosco de la Vega, head of Mexico’s National Agricultural Council, the country’s main farming lobby, said Mexico had sanitary agreements for pork legs with 11 countries, and that Brazil, a major pork producer, was not on the list.

“With Brazil we don’t have the sanitary measures. That’s why it is not being considered,” he told Reuters.

Canada, Australia, New Zealand, Denmark, Chile, Spain, France, German, Italy, Belgium and the United States can all sell pork legs to Mexico, he said.

Earlier this year, Mexico and the European Union reached a provisional agreement on an expanded trade deal adding farm products including pork to the tariff-free list. The new deal is not yet in effect.

Some U.S. industry analysts said it would not be easy, or cheap, for Mexico to switch to suppliers further afield than its northern neighbor.

“For better or worse, Mexico has become as much dependent on the U.S. for the pork that it feeds its people as the U.S. has become dependent on Mexico,” said Altin Kalo and agricultural economist with Steiner Consulting Group in Manchester, New Hampshire.

He said pork supplementing pork from other countries would require it be frozen, raising handling costs.

“In the short term, we don’t think there are any simple ways for Mexico to replace the pork it currently buys from the U.S.”

U.S. pork processor Hormel Foods Corp markets products in Mexico and said it will closely monitor the impact of the tariffs. Shares were up 0.3 percent in afternoon trading.

Other major pork processing companies that could feel the pinch of lower prices if Mexican tariffs lead to a glut in the United States include Tyson Foods Inc, Smithfield Foods Inc and JBS USA Holdings.

Canada’s ability to replace U.S. sales is limited by its much smaller ham production than the United States and tight truck capacity, said Richard Davies senior vice president of sales and marketing at Olymel LP, one of Canada’s biggest pork exporters, saying he did see possible higher ham premiums.

De la Vega said he expected U.S. pork farmers who rely on the Mexican market to offer discounts to safeguard their relationships with buyers.

“Since they know this is temporary, it is only in place until they get rid of the steel and aluminum tariffs, they say I better offer discounts and we can keep working.”

Despite escalating tensions between the United States and Mexico, Guajardo said on local television Tuesday evening that he sees a better than 50 percent chance of reaching an agreement in principle on the North American Free Trade Agreement this year.

All of the “sections, composition and achitecture is ready,” Guajardo said. “What’s missing is the political will and the flexibility necessary to be able to close (the deal).”

Reporting by Adriana Barrera and Dave Graham; Additional reporting by PJ Huffstutter and Theopolis Waters in Chicago and Rod Nickel in Winnipeg; Writing by Frank Jack Daniel; Editing by Franklin Paul and Lisa Shumaker