U.S. appetite for ethanol fuels rise in Mexican corn prices

Tortillas, and the corn used to make them, have been a Mexican staple for thousands of years. So it's no surprise that tens of thousands packed into Mexico City's central Zocalo plaza to protest a spike in the price of tortillas and other staple goods. The price increase and subsequent demonstration were unwelcome developments in a country that had just endured a bitterly contested presidential election. While these events in Mexico may seem unrelated to the United States' efforts to wean itself from foreign oil, they are, in fact, closely linked.

To comment on this and other stories go to the Knowledge@W. P. Carey Blog. Just before lunchtime on any given day across Mexico, much of the nation is carrying out a centuries-old ritual: Standing in line for their daily ration of tortillas at the local corner store. These tortiller as, as the shops are called in Spanish, dispense their steaming specialty, which are quickly wrapped in cloth to keep them warm.

They are then rushed home as the final and irreplaceable ingredient for the day's meals. Once on the table, the tortillas are wrapped around beans, rice or meat, and used to soak up salsa or spoon up anything left on the plate. Leftover tortillas are later fried until they harden, becoming tostadas, the likely precursor of the U-shaped taco shells found in U.S. supermarkets.

These tortillas, and the corn used to make them, have been a Mexican staple for thousands of years. So it's no surprise that tens of thousands packed into Mexico City's central Zocalo plaza to protest a spike in the price of tortillas and other staple goods. The price increase and subsequent demonstration were unwelcome developments in a country that had just endured a bitterly contested presidential election.

Only weeks after taking office, new President Felipe Calder n — already burdened with steering the nation out of its post-electoral conflict — was now accused of standing idle while Mexico's staple food became too expensive for his opponent's main constituency — the poor.

Cause and effect

While these developments in Mexico may seem unrelated to the United States' efforts to wean itself from foreign oil, they are, in fact, closely linked. With the hunt for alternative energy in full swing, America last year boosted its production of ethanol, a compound that can be used as fuel or a fuel additive. While ethanol can be created from sugar cane or soybeans, U.S. ethanol plants largely run on yellow corn.

"We can call corn the magic plant," said Dawn McLaren, a research economist at the W. P. Carey School of Business, in a recent interview. "It can do anything we want it to do — it can fuel our cars, it can feed us. We can do all sorts of different things with corn derivatives." With well over 100 ethanol plants functioning in the United States, the added demand for corn as an energy source drove the crop to near-record highs on the world market.

The grain is commonly used to feed livestock and chickens as well, so meat and poultry prices also jumped. With dozens more ethanol plants scheduled to begin operating by the middle of 2008, world demand for the ancient Aztec crop has perhaps never been higher. And there is no end in sight — a bill currently advancing through the U.S. Senate would mandate that America increase its ethanol production sevenfold by 2022 while simultaneously slashing gasoline consumption.

"If we're now making a permanent shift towards substituting domestic corn for foreign oil, this is going to cause huge problems in our food supply," McLaren said. She added, "Here in the U.S. we look and say, 'Oh, we've got plenty of food.' But what is going to happen south of the border?" What has already happened, as data compiled by McLaren in a recent report shows, is a rise in the price of tortillas that has handily outpaced Mexico's Consumer Price Index (CPI) since 2002 — the same year the United States began significantly boosting ethanol production.

Additionally, even more new uses for corn may pop up in coming years. Firms such as Archer Daniel Midland, Hershey's and Nestle have recently lobbied the Food and Drug Administration to modify its definition for chocolate, allowing it to replace cocoa butter with cheaper vegetable oil (most commonly produced with corn). So with the world's largest consumer market gobbling up corn for livestock, gas tanks and possibly even chocolate bars, how much will be left for Mexico's beloved tortilla?

Guillermo Campos Coy, who heads a civic organization that represents the Mexican corn industry and promotes the consumption of tortillas, expressed concern. "I don't think that the cultivation of corn can grow at the same rate as the production of ethanol," Campos Coy said in an interview. "This is a risk. In the United States they can use corn as fuel but for us it's food and the end result is they're interfering with our food supply."

Mexico's supply

Corn is far and away Mexico's most important crop, with over half of the nation's arable land dedicated to its cultivation during the last decade, according to information from the Mexican agriculture secretariat. Mexico is the world's fourth largest producer of the grain and is self-sufficient in the production of white corn, generally used for tortillas and human consumption. It imports yellow corn from the United States, however, as animal feed.

Increased demand for either variety results in rising prices for both, since they can be easily substituted for the other. "Land is limited and capital equipment for corn is for corn and not, for example, tomatoes," McLaren explained. "Farmers must buy other machinery to change crops. This means that they will switch between industrial and food corn, but not to other crops. This causes industrial and food corn prices to move together."

With the widespread cultivation of corn, tortillas have always been a bargain for the poor. As recently as early 2006, a kilogram of tortillas went for 6 pesos (US$0.55). Today, the same amount costs 8.5 pesos (US$0.78). While the increase may seem miniscule to U.S. consumers, minimum wage in Mexico currently ranges from 48 to 51 pesos (US$4.41 to 4.68) per day. Mexican nutrition experts say the nation's poor eat an average of 400 grams of tortillas daily, representing 40 percent of their protein intake.

So for a family of four that depends on the minimum wage, tortillas can eat up more than a quarter of all income. McLaren said the proportional blow to the family budget far outweighs that of the rising cost of gasoline in the United States, where a recent study showed Americans now dedicate 4 percent of their total budget for fuel, up from 3 percent. "Imagine how it must feel for someone to now have to pay this much more for food," she said. "[Tortillas] are not something people can make a choice about, especially considering they're a staple."

Seeking a solution

The Mexican government has found at least momentary relief in a handshake deal with producers and retailers to keep the price steady at 8.5 pesos per kilo, a pact that was recently extended until the middle of August. Observers agree, however, that the measure is only a temporary solution. "When you put in price caps it causes other economic problems," McLaren said. "They will be okay for the short term, but [the cap] won't be able to hold out in the long term, especially if the trend [in the United States] continues towards the corn substitution."

Campos Coy echoed McLaren's criticism, saying Mexico needs "serious measures rather than temporary fixes. If you ask me what the government has done, I'd say nothing," he said. He called for long-term planning, greater government aid for farmers in buying seeds and fertilizers, and investment in technology to make the corn industry more efficient and productive. Others say greater competition is needed as well. David Franco, a specialist on Mexican economics with JPMorgan, pointed to corn flour giant Gruma, which controls an estimated 85 percent of the nation's market.

He said that the industry, which comprises a relatively small number of companies, can "put caps on production, and this of course can be defined as a monopolistic practice." Franco added the immediate danger is that high corn prices can lead to more widespread inflation by "contaminating" the cost of other products such as beef and poultry, which are fed corn. For McLaren, the issue requires in-depth studies to define the problem.

She added the United States shares responsibility in finding a solution. "We need to think about it not as a tortilla problem or a dependence on foreign oil problem, but as a North American issue that we need to deal with," she said. Campos Coy, who formerly worked for the Mexican economy secretariat and has participated in trade talks with Washington, said he wasn't optimistic that help would come. "In general, I think the United States isn't very interested in whether or not Mexico has enough corn for tortillas," he said, adding: "I think we Mexicans have to solve this problem by ourselves somehow."

Stability at stake

Corn is poised to remain a hot issue in Mexico in the coming years. In addition to concerns over rising prices, environmentalists say agro-businesses have "contaminated" native strains of the grain with transgenic variations, while farmers say they can't compete with subsidized imports from the United States. Under NAFTA, all trade tariffs on corn will be removed on Jan. 1, 2008.

While the demonstrations over the outcome of the 2006 election have died down, corn remains an issue that could potentially mobilize the left and the poor once again. "It is a risk to stability," McLaren said. "This is something that [in the United States] they take lightly But tortillas are very important in Mexico and especially with the poor." But if a battle is brewing over corn in Mexico, it's still not apparent.

Corn farmers are flush with profits and neighbors still line up at the local tortiller a, although they grumble more when they reach for their wallet. Carmen Garcia, who has worked in a Mexico City tortiller a for 10 years, said she isn't concerned. "Yeah, they get mad sometimes," she said, referring to customers' reaction to the higher price. "We tell them we have no choice, we have higher expenses. But they've pretty much gotten used to it by now."

Bottom Line:

• The U.S. push to produce more ethanol has resulted in higher corn prices — making tortillas more expensive in Mexico.
• Higher tortilla prices are a pressing topic in Mexico, and some are worried that if prices continue to climb, it could spark a protest movement.
• Tortilla costs have currently been capped due to a hand-shake deal between the government, corn flour producers and retailers. The cap will last until Aug. 15.