Monday, January 15, 2007

The Ripple Effect

The newly-elected center-right President of Mexico is facing a crisis over the price of corn. Tortillas are a staple of the Mexican diet, especially for the poor, and the price of corn tortillas in Mexico is soaring. Politicians blame speculators, but when you assess the factors driving the North American corn market in which such speculation is occurring, the largest seems to be the growing US demand for corn-based ethanol. Several months ago I wrote a posting describing the growing food/fuel arbitrage being created by our increasing reliance on biofuels. I have to admit I was thinking mostly of the impact on US consumers, through increases in the cost of anything that had corn as an ingredient, whether in the form of animal feed or high-fructose corn syrup. When I considered the developing world, it was in terms of the opportunities the biofuel market might create. It didn't occur to me that Americans weren't the most vulnerable consumers in this equation.

While the corn varieties used for ethanol and tortillas are different--and becoming more different all the time, as biotech devises new corn varieties that are genetically optimized for ethanol production--they meet in the farmer's decision of which variety to plant: corn for people or corn for cars. The near-to-medium-term challenge for biofuels is not whether there's enough cropland for ethanol and biodiesel crops to replace all the oil we're importing, but the degree to which inflation in consumers' food budgets might offset the economic and geopolitical benefits of increased energy security. In the US, food accounts for about 10% of disposable income, down from 15% in the 1960s and 12% in the 1980s. That compares to about 3.5% of disposable income spent for gasoline, at the current price of $2.31/gallon. This 3:1 ratio favoring food is doubtless much higher in countries like Mexico.

In many respects, ethanol has constituted this country's primary alternative energy strategy for the last twenty-five years. It currently contributes roughly 3% to total gasoline volumes across the country. But while this has had a modest impact on energy prices, it is enough to drive up corn prices across an entire continent, and that effect is only getting started. Like all agricultural subsidies, the ethanol subsidy distorts markets at home and abroad, and that impact is now being felt disproportionately in poor communities. While that ethical dimension probably isn't sufficient to deter further expansion of ethanol, it ought to provide an extra incentive to accelerate the development of biofuels that can be produced from plants that don't compete for cropland, and from crop waste. In the meantime, we can add Mexican peasants to the list of those affected by our energy policies.

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