Monday, April 02, 2007


Ethanol is quite the buzzword this year. Presidents Bush and Lula just finished their trip to Camp David, where Bush actually mentioned the idea of cutting U.S. agricultural subsidies, but not tariffs. (They also announced that El Salvador would be the site for an ethanol pilot program. What exactly is this pilot program? No one knows.)

Meanwhile, Fidel Castro denounced the production of ethanol, saying it would condemn three billion people to premature death, since land that could be used for food would be set aside for fuel. Brazil’s Foreign Minister then gave a brief but fairly cutting response, saying his ideas were out of date.

Ethanol is creating curious effects. The tortilla crisis in Mexico is related directly to the demand for corn, and so at least the use of corn for ethanol is widely criticized. Environmentalists decry deforestation for huge sugar plantations. And then we have Lula’s administration in step with Bush and criticizing Castro.


Anonymous,  5:05 PM  

Apparently the tortilla crisis has more to do with corn production in Mexico than ethanol use. Since we use yellow corn (ethanol) and they use white corn (tortillas). I don't know if they are traded as sepearate commodeties though

Greg Weeks 5:49 PM  

From what I understand (and you can check out my original post for the article) the price of white corn is indexed to yellow corn. If that is wrong, I'd be interested to know.

Greg Weeks 9:06 PM  

Justin, I just deleted your comment. If you want to debate, cool. If you want to insult, do so elsewhere.

Justin Delacour 11:22 PM  

Fine, I'll pose a simple comment. KA, I'm curious as to why you act so befuddled about the notion that ethanol producers' demand for corn has drastically increased Mexico's corn and tortilla prices.

Even Bloomberg --a U.S. business wire that is certainly no friend of Castro or Chavez-- essentially confirms Castro's point that there is a trade-off between ethanol production and food production. "Corn [in Mexico] has soared 15 percent in the past eight weeks and 119 percent since late 2005 as demand for the grain grows from ethanol producers," Bloomberg reported on March 5.

Michelle 12:06 AM  
This comment has been removed by the author.
Michelle 12:07 AM  

Sorry...bad link. Unrelated, but have you seen this?


boz 8:39 AM  

As Greg mentioned, the price of white corn is indexed to yellow corn, so ethanol demand is affecting the prices.

Additionally, as you mention, there is an issue with how tortillas are manufactured in Mexico. Over 85% of production is controlled by a duopoly (is there an industry in Mexico that isn't a duopoly?). That duopoly exercises pretty strong control over the corn supply and tortilla prices.

The effect on food prices is not permanent. The corn markets are already increasing supply and additional sources for biofuel will become economical over the next decade, which will reduce demand.

Anonymous,  10:44 AM  

I agree with KA. Critizicing ethanol production because it affects corn commodity prices is a shortsighted comment. As demand grows, more corn will be grown to meet global demand. Simple economics dictates that markets will set prices for products according to their highest and best use. If corn can garner more in global markets as a fuel than as feed for livestock, then what farmer (American, Mexican, or otherwise) would choose the lower price? Of course, ethanol will only succeed as an energy source if it is cheaper than other energy sources (i.e. oil).

Could Castro's complaints be based more on the fact that sugar production in Cuba is a fraction of sugar production in Brazil, so Brazil has a competitive advantage over the communist-run Cuba? Cuba can't compete with Brazil's economies of scale for sugar production, so the solution is to throw darts at Lula.

Anonymous,  6:19 PM  

I found some info and I still have questions :)

This is what happens when economics and Gregor Mendel meet:

So apparently there are different market prices for yellow corn No.2 and white corn No.2 (the former being used for ethanol and the later for tortillas). Although like Boz said it looks like they are indexed the same on the Chicago Board of Trade.

corn prices google " corn, "No. 2 white" "

There does appear to be some discrepancy in the media reports. Since on the one hand they say yellow is used for ethanol not white. So why the run up in white? Even if they are indexed the same, I would guess that white would be sold at a discount since the demand increase is only for yellow corn (not white). Or are ethanol producers now using white?

Also the US exports very little white corn to Mexico so in theory they are self sufficient for tortilla corn. The US does export more yellow corn (vs. white corn) for animal feed, have meat prices increased in Mexico to? Even if they are indexed in the US, Mexico is self sufficient in theory for white corn. Is Mexico exporting more white corn now instead of making tortillas?

As usual it seems that multiple factors are at work, ethanol, speculators, weather, the mexican tortilla monopoly. With time the market will fix itself, but we have to get away from corn. BTW, I'll probably be posting stuff related to this topic I found some interesting peer reviewed papers on the topic.

Anyways, I'll let the topic rest for Dr. Weeks sake. I asked a former econ. professor of mine who studies these things, he said he would get back to me.

Greg Weeks 8:10 PM  

Interesting. Obviously I don't know the answers to many questions. Really, why would white and yellow corn be indexed at all? Is white corn now being used to produce ethanol? Would separating them make the price of white corn go down?

boz 8:40 PM  

The market makes the assumption that there is a single "corn" market of temporarily limited supply. Farmers choose which type of corn to grow, but there is a short-term limited total supply.

As I understand it, that's the model for how the market works. As demonstrated by your points above, it doesn't fully reflect the reality of what is going on with the different types of corn. However, it seems to work well enough for commodity traders.

If someone can figure out how to exploit the differences between yellow and white corn to make profit, those traders will be forced to adjust that model. Until then, the prices of white corn and yellow corn will move together.

KA, to your question about corn feed, meat prices are up in nearly every country in the hemisphere as are soy prices (on the assumption that some farmers are changing from soy to corn to meet new demand).

The change in prices isn't all about ethanol (there are plenty of other variables), but it is playing a role.

Justin Delacour 8:55 PM  

"Cuba can't compete with Brazil's economies of scale for sugar production, so the solution is to throw darts at Lula."

Castro isn't throwing darts at Lula. He's throwing darts at Brazil's agro-export elite, whose political and economic influence Lula unfortunately cannot ignore.

To attribute ethanol policy to Lula is to really lose sight of the power behind the throne. Unfortunately, such superficial analysis is typical of those who seek to evade any critical analysis of who really rules a grossly inequitable society like Brazil's.

Anonymous,  9:37 PM  

Thanks Boz, I was obviously under the impression they were totally seperate commodity markets.

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