Monday, January 29, 2007

Señor, Where's My Tortilla?

At the risk of sounding drunk on the ethanol story, here is another unintended consequence of that boondoggle. The excellent Latin American editorial columnist Mary Anastasia O'Grady describes in today’s Wall Street Journal a scenario south of the border whereby Mexicans may soon discover they have run out of tortillas.

This unlikely of scenarios requires a "perfect storm" of government intervention on both sides of the border. It hasn’t happened yet, but warning signs of the coming storm are visible. The first of these, the U.S. ethanol subsidy, is already underway. As a result, global corn prices are rapidly rising. Corn futures are at record levels.

Tortillas, made from corn, are a ubiquitous and tasty staple of Mexican cuisine. Spanish conquest, wars, revolutions, and socialist economic policies could not dislodge the tortilla from its central place in Mexican cooking. However, a perfect storm combination of artificially high corn prices caused by the U.S. ethanol subsidy, Mexican quotas on imported corn, and impending price controls has the potential to do so.

How could this happen? Mexico has long imposed a quota limiting imports of corn. The ostensive purpose of this policy is to ensure a sufficiently high price of corn domestically so that the many thousands of Mexican subsistence farmers could keep operating. Farming small plots of land high in the mountains in a style that has barely changed since the days of the Aztec Empire cannot compete with the economies of scale of modern, industrial farming.

However, Mexican corn farmers are free to export their corn if the global price is high enough. Guess where the big new demand for corn is pushing global corn prices to record levels? The new demand for corn is coming from the U.S. ethanol plants that are converting corn into ethanol.

Now, there can still be enough tortillas on the street corner, albeit at much higher prices, if the price mechanism is not interfered with. Tortilla prices will simply rise to reflect the higher prices of corn.

But in Mexico, tortilla prices are a political issue. So, the government there is considering imposing price controls on tortillas. If that happens, in accordance with the economic law of supply and demand, a shortage of tortillas will develop. Too many people will want tortillas because the price is held artificially low, and not enough tortilla makers will want to make tortillas because they cannot make a profit when corn prices are so high. So, don’t be surprised if next time you are in Mexico, you overhear one hungry Mexican asking another: ¿Señor, dondé está mi tortilla?


Note: Edited last paragraph for clarification and style on 1/30/06.

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