Mexico and Tortillas
Corn prices have just peaked, reaching record heights in a decade. The issue is of utmost importance, especially given that tortillas –which are essentially made of corn- account for 40% of the proteins in the average Mexican’s diet.Different explanations have been provided for this rise in price. It has been assessed that the increase in the price of corn was due to monopolistic practices on the part of major producers such as Gruma, which controls 70% of the tortilla market. It has also been suggested that increase in demand for corn-based ethanol in the U.S. was responsible for the rise in price of the tortilla in Mexico. Indeed, both these monopolistic practices and demand for ethanol increase the price of corn in the short run, just not that of the same corn.
As a matter of fact, where the tortilla is made of white corn, ethanol is made of yellow corn. The recent hike in demand for ethanol, partly attributable to president Bush’s call for greater use of biofuels in his State of the Union, has increased the demand for yellow corn, which brought about an increase in its price and quantity supplied. On the other hand, the monopolistic practices of the Mexican corn giants have succeeded in decreasing supply of white corn, which brought about an increase in price and a decrease in quantity demanded; nevertheless, Gruma and others were left with greater profits, especially given that Mexicans are so dependent on tortilla and thus have an “inelastic” demand. Hence both events, since they do not relate to the same product, are unrelated in the short run. This is what The Economist partly debunked. That said, even though it doesn’t have any effect on the price of the tortilla in the short run, the increase in demand for yellow corn has an inherent effect on the tortilla price in the long run.
Eventually, as Felipe Calderón cracks down on monopolists and either catches them or makes the cost of inflating prices –also known as rent seeking to economists- too high, the artificial increase in price due to supply control on the part of Gruma and its partners in crime will fade.
But most importantly, what was hitherto an irrelevant increase in demand for different products will soon become direly relevant for Mexicans.
To be sure, in the long run, demand for tortillas will shrink as Mexicans develop alternatives. Be that as it may, recalling the extreme social importance of an aliment which, in the Mexican culture, was created by the gods, we are not to expect any staggering decrease in demand. This is vexing because it would have implied that Mexicans had found other cheaper alternatives to satisfy their needs, and a decrease in the price of the tortilla.
On the other hand, we are to expect a great elasticity of supply of yellow corn in the long run, causing an increase in output and a decrease in price of yellow corn. But this elasticity of supply does not fall from the sky; it comes from close production substitutes. And what is a close substitute to a field growing yellow corn? A field growing white corn, of course. With the high and increasing demand –and thus price- for yellow corn, many white corn producers will turn to producing yellow corn, which sells for more.
But will this go on forever? Until there is no more white corn in the market? No, of course. Producers will stop switching to yellow corn when the scarcity of white corn will have brought its price equal to that of yellow corn –comfortably assuming that they cost the same to produce. In other words, the price of white corn will increase until it is….high enough. Not too pretty a picture for low-income Mexicans.
posted by blogger @ 4:10 AM
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