Sunday, February 11, 2007

The Price of Corn in Iowa—and Mexico


At his recent State of the Union address, President Bush made more than his usual nods toward energy independence, and states from Iowa—where I’m living—to Idaho stand to win big if the president follows through on his ambition to quintuple production of renewable fuels. Last year’s high petroleum prices increased ethanol demand sharply, and Farm Belt refiners are already running full out while licking their lips over expansion plans.

The result has been a spike in demand for corn, which in turn has doubled its per-bushel price in the last six months.

That’s great news for farmers in Iowa and neighboring states, where the vast majority of the country’s corn is produced. It’s not such good news for downstream users of corn syrups, like Coca-Cola and Pepsi, which use football stadium-sized amounts off the stuff each year but have little retail pricing power in an eternally competitive beverage market.

It’s also raising prices for animals traditionally fed by corn or other grains (cattle, chickens), since farmers are planting more corn and less everything else; here in the Hawkeye State, that means many fewer soybean fields.

But another unintended consequence of the president’s energy-independence drive has gone unnoticed until now: Rising world corn prices are increasing the price of tortillas in Mexico, where they are a staple food among the poor. In some cases tortillas are now three or four times as expensive as they were a year ago, and Mexican consumers are increasingly protesting the rise.

It must be doubly baffling to consumers in Mexico, which is a net oil exporter, to know that corn is ever-pricier because the U.S. wants to convert it to economically impractical ethanol. Tax subsidies are needed to make ethanol practical here, and meanwhile the rise in corn prices is, in essence, a regressive tax on some of Mexico’s poorest consumers.

This is one definition of “blowback”: The attempt to decrease U.S. dependence on foreign oil leading to a damaged U.S. image among Mexicans, as well as a potential wave of economic refugees to the U.S. should food inflation increase South of the Border.

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