Monday, February 5, 2007
Mexican Tortillas, Corn and USA Ethanol Demands
Mexicans are unhappy about tortilla prices. They’ve doubled in the last year, far ahead of Mexico’s four percent inflation
rate. Part of this has to do with the ill effects of a quasi-monopoly the Mexican
government has given since 1990 to Gruma, the largest tortilla maker in the country.
But part of it has to do with the rise in corn prices
throughout the North American market — driven by a rise in demand for ethanol, which is made from corn. (Or, in Brazil and elsewhere, sugarcane.) The question is
why is the price of ethanol rising?
This is a tangled tale of government incentives.
In the United States there are a variety of state
and federal subsidies and regulations that boost ethanol production, because ethanol is the poster child of biofuel and flex-fuel
vehicles. Minnesota, for example, requires that a portion of the fuel sold in
the state be made of E-85, a blend composed of 85 percent ethanol and 15 percent gasoline, while California and several northeastern
states mandate use of E10, a blend of 10 percent ethanol and 90 percent gasoline.
Refiners receive a US$0.51 federal tax rebate for
each gallon of ethanol they add to gasoline, and new federal alternate-fuel mandates will require a massive increase in ethanol
use — doubling to 7.5 billion gallons by 2012, and doubling again by 2017. As
well, US$0.50 per gallon tariffs on Brazilian ethanol (made from sugar cane) further raise the price for American corn-based
But astonishingly, the US 1990 Clean Air Act is ultimately
responsible for the current rise in demand for ethanol. The Clean Air Act required
that in a great many cities and metropolitan areas with bad air quality, American gasoline be reformulated with oxygenates,
so as to improve combustion and reduce smog.
Refiners first chose to follow this regulation by
providing the relatively cheap additive MTBE (methyl tertiary butyl ether). MTBE,
however, has recently been indicated by several scientific studies to be a carcinogen that can contaminate groundwater. As a result, many states began to prohibit the use of MTBE as an additive, and in
2005 the US Congress declined to provide liability protection for refiners should they continue to use MTBE.
Ethanol is the only commercial substitute for MTBE,
and demand for ethanol has skyrocketed — and as a consequence, so has the price of corn.
The US Department of Agriculture predicts that the
demand for corn by the ethanol industry will be up almost 50 percent in 2007, and may consume roughly half of the US corn
crop. Unhappiness about tortilla prices may be only the beginning: corn feeds
cattle and pigs, so the price of meat is expected to rise in tandem with the rise in price of corn products. Lester R. Brown, president of the Earth Policy Institute, was quoted in the Boston Globe as saying that
the rise in the price of corn "could create food riots in low-income areas around the world.'' (John Donnelly, “Ethanol
use may drive up price of corn,” January 4, 2007.)
The point of spelling out this chain of consequences
is to restate the old lesson that government intervention often has unanticipated, negative consequences, paid for in the
most unexpected locations. American intervention to raise environmental standards
is being paid for in higher food prices — a payment that hits the poor of the Third World worst of all.
It also has some curious effects on wildlife conservancy:
stretches of American farmland that might otherwise have gone out of production, and been left to go wild, will now be turned
over to corn. Corn land zoomed from 76 million acres to 86 million acres between
2005 and 2006. Clean air is also being paid for by a spread in cornfields.
This is not to say that this section of the Clean
Air Act wasn’t worth passing into law: presumably it has improved the health of some millions of Americans, and saved
the country some billions in medical costs. Furthermore, the current rise in
corn prices will probably be temporary: as more farmland is put into corn to meet the demand for ethanol, and as corn productivity
per acre continues to improve, it is expected that corn prices will begin to lower once more by 2008 or 2009. So there may only be a brief spike in corn prices for a year or two.
Finally, there are obviously a great many other market
forces that have affected, and will affect, the price of corn and corn-products such as tortillas. But the Clean Air Act does impose a significant cost on
the worldwide price of corn, and it is a cost imposed by one of the richest countries in the world that is paid in good part
by the poorest of the world’s poor countries. This effect ought to be noticed
when determining the moral calculus of environmental laws.
As a last note, it’s worth considering that
the sustained demand for ethanol as a fuel additive may mean that it will finally become a profitable industry solely by meeting
the demands for that market. The rationale for the other subsidies for ethanol
then diminishes: the Clean Air Act alone has now become the most efficient possible subsidy for ethanol.
The other state and federal subsidies for ethanol
will increasingly become unnecessary for ethanol production: rather, their main effect will be simply to increase the price
of corn, and so, indirectly, take food from the mouths of the poor. In consequence,
the case for abolishing these other subsidies will also become stronger year-by-year.
Their abolition would be one of the most effective actions Americans could take to reduce world hunger.
David Randall, a MexiData.info guest columnist, is
a postdoctoral fellow at Concordia University in Montreal, Canada. He can be reached at firstname.lastname@example.org.