January 24, 2007
The Dark Side of Ethanol
It's like something out of the twilight zone.
Soaring international demand for corn has caused a spike in prices for Mexico's humble tortilla, hitting the poor and forcing President Felipe Calderon's business-friendly government into an uncomfortable confrontation with powerful monopolies.Tortilla prices have jumped nearly 14 percent over the past year, a move the head of Mexico's central bank called "unjustifiable" in a country where inflation ran about 4 percent.
Economists blame increased U.S. production of ethanol from corn as an alternative to oil. The battle over the tortilla, the most basic staple of the Mexican diet, especially among the poor, demonstrates how increasing economic integration is felt on the street level.
It's good to know that Big Oil aren't the only ones blamed with collusion.
The federal government's antitrust watchdog announced this week it was investigating allegations companies were manipulating corn prices, and making deals to limit the supply of corn to boost prices of tortillas.Oil and Energy Posted by AlexC at January 24, 2007 9:26 PMFor low-income Mexicans, who earn about $18 a day on average, the increasing prices have hit hard. According to the government, about half of the country's 107 million citizens live in poverty.
"When there isn't enough money to buy meat, you do without," said Bonifacia Ysidro, but "you can't do without" tortillas.
The headlines this week in impoverished Central America are as follows:
- Pork products to increase 20% due to corn price hike
- Mexican government to release subsidized corn to poor (due to hike)
This is one result of Congress last year mandating that ethanol be added to gasoline as an oxygenator. The law specifies that the ethanol must be made from corn.
The U.S. is certainly entitled to do with its corn as it pleases. But choices do have consequences.
Posted by: El-Visitador at January 24, 2007 10:49 PMPrice manipulation?
The increase in the price of corn will cause corn producers to produce more. As supply increases, the price of corn will fall as will the price of the tortilla.
We heard this same argument with regards to oil just a few short months ago, yet the price of oil has plummeted. Go figure.
Posted by: Everyday Economist at January 25, 2007 12:32 PMWell said, EE. You're dead right in a real market. My concern is the government manipulation through subsidies. The tortilla baker has to compete against a subsidized ethanol plant.
No wonder Senator Grassley was weeping tears of joy.
Posted by: jk at January 25, 2007 1:46 PMSubsidies are unlikely to push up prices. In fact, a government subsidy often encourages overproduction and thus lowers the price. This is why foreign farmers find it so hard to compete with countries with large farm subsidies.
Unless the United States were to develop some type of New Deal-style subisidy that was designed to limit the supply, it is unlikely that we will see a sustained rise in corn prices.
The idea behind the ethanol subsidies is to encourage more production. Currently, both tortilla-lovers and ethanol producers are competing for the same scarce resource. The subsidies will eventually lead to increased production and thus lower prices.
Posted by: Everyday Economist at January 25, 2007 3:21 PMI'm afraid our friend Everyday Economist is vastly oversimplifying the situation by failing to account for the myriad ripple effects of government manipulation of the marketplace.
He's also mistaken about just exactly what the subsidies JK mentions are for. It is not corn production that is being subsidized, but ethanol production. That, combined with the "maize only" mandate that El-Visitador claims (the validity of which I have no reason to doubt), creates an artificial spike in demand, which has a predictable effect on price.
Meanwhile, ethanol as a practical fuel is a disaster.
Posted by: johngalt at January 26, 2007 1:17 AM*** CORRECTION *** No corn mandate ***
I appreciated johngalts' comment regarding my comment, but it made me reflect on what my source was. And my source was my memory, which has been known to fail from time to time.
So I looked at a number of sources, including the Act itself, the Energy Policy Act of 2005. Corn is not mandated by law at all.
Nonetheless, most ethanol in the U.S. is made from corn, which obviuously results in rising corn prices. And the U.S. does produce (or at least formerly produced) 70% of worldwide corn exports; therefore, any increases in the internal U.S. market have immediate consequences in the (mostly poorer) countries elsewhere that import corn as either human or animal foodstock.
Ethanol could be made in the U.S. from a cheaper, more efficient per acre source: sugarcane. But sugarcane is heavily dutied and protected (which is why sugar is 4 times costlier in the U.S. than in most places around the world), whereas corn is subsidized. This is why most ethanol is currently made from corn.
some sources:
Posted by: El-Visitador at January 26, 2007 2:46 AMhttp://www.heritage.org/Research/EnergyandEnvironment/wm1053.cfm
http://en.wikipedia.org/wiki/Energy_Policy_Act_of_2005
You're both right (I'm a uniter). I'll do a post about this, but Cafe Hayek has more on tortilla-gate. It seems Mexico has a quota to limit imported corn:
Posted by: jk at January 26, 2007 10:16 AM | What do you think? [7]