Why are You Putting Tortillas in Your Tank?: Effects of Ethanol Exports on the Price of Corn in Mexico and Other Import-Dependent Countries

The Problem

Biofuel—any fuel source made from renewable products—is infallible. At least, that is the prevailing assumption. How could anything negative come from such a positive concept? By discovering and employing sources of renewable energy, we are extending the life of our planet, maintaining our global climate, and ensuring a future for humanity. Unfortunately, there is a dark side to this hopeful planetary savior, and it is the more immediate threat to humanity. Ethanol, the biofuel slowly encroaching upon gas stations near you, is a product derived  from corn. This wouldn’t be a problem, except for the equation that pits Climate Change against World Hunger. The more corn is converted into fuel for cars, the less is available to be fuel for humans; furthemore, there is one country in particular that relies on corn to survive—one whose current inability to provide enough corn to its citizens is largely the fault of the United States: Mexico.

Tortillas are nothing less than a staple food in Mexico. They are an essential part of the diet of the majority of Mexicans, and in recent years, this has become problematic. One might think, given how much corn must be produced in order to craft all of these tortillas, that corn would be produced in mass amounts around Mexico to the extent of a surplus of exports; this, unfortunately, is not the case. In fact, Mexico is today a major importer of corn—a dependency that Mexico has been desperately trying to reduce through support programs for small farmers (“Biofueling Hunger” 3). However, these efforts have been largely negated by the actions of the United States, “including subsidies for ethanol conversion and deregulation of financial markets” (Lagi, Gard-Murray, and Bar-Yam). And, of course, there was NAFTA.

The rise of Mexico’s import dependency, in large part due to the North American Free Trade Agreement (NAFTA), has left the country vulnerable to rising US corn prices. Since 1990:

■ Mexico’s agricultural trade balance swung from a small surplus to a $2.5 billion deficit in 2011;

■ Mexico’s import bill from the United States soared from $2.6 billion to $18.4 billion in 2011; and

■ Mexico’s imports of corn went from 7% to 34% in recent years. (“Biofueling Hunger” 3)

These effects impact Mexican citizens on a painfully tangible level. As the average cost of food consumed by a family experienced an increase of 53% between 2005 and 2012, Mexico’s poorer populations experienced a much higher difficulty, and in some cases impossibility, of purchasing enough food to eat (“Biofueling Hunger” 10). This hit women and children the hardest, leaving five million children hungry.

The Blame

It is painfully obvious that the U.S. is largely at fault for these problems. Ethanol production within the United States, which converts about 40% of its corn to ethanol, has contributed to the conversion of approximately 15% of the world’s corn (Wise 2). In other words, globally, 15% of corn is made inedible and turned into biofuel due to U.S. involvement, which has occured as such:

The growth in U.S. ethanol production has been dramatic and quite recent, stimulated by high oil prices, government subsidies and tariff protection, and a mandate for increasing biofuel use that has nearly 10% of U.S. gasoline sales accounted for by ethanol.

Biofuels expansion in general, and U.S. corn ethanol expansion in particular, are widely seen as among the major contributors to the recent surge in food prices. . . . These, in turn, have had a direct impact on the food-import bills of developing countries, many of which have become heavily dependent on outside sources of basic food commodities in the last 25 years. (Wise 2)

This redirection of corn production removes a fairly large percentage of corn from the global market equation; without current biofuel policies, this corn would typically be used to feed people and livestock (Wise 4). This consequently reduces the supply while doing nothing to meet the demand, resulting in price hikes on agricultural commodities. The more biofuel is produced, the more expensive food becomes.

Source: Wise
Source: Wise

The Source

The increased cost of food as influenced by the rise of ethanol, and the subsequent struggles that have ensued, have not gone without scorn. However, not until recently was it discovered that ethanol was to blame. Food price hikes resulted in riots across over 30 countries, and the rioters wanted justice just as much as they wanted answers—but it wasn’t until May 2012 that those answers could be provided (Lagi, Gard-Murray, and Bar-Yam).

Many factors have been proposed as causes for the price increases, from adverse weather to meat consumption in China, from increases in oil prices to exchange rates. In a recent paper, we tested these factors one by one, and constructed a model that explains what is behind the odd behavior of food prices. The results show there are just two main causes: increasing corn-to-ethanol conversion in the United States and excessive financial speculation. (Lagi, Gard-Murray, and Bar-Yam)

Financial speculation—conducting a transaction at the risk of losing everything invested, in the hopes of gaining a significant profit (“Speculation Definition”)—was the sole cause of a 76% increase in corn prices and import costs to Mexico between 2007 and 2008. This may also be tied to ethanol conversion, as economists attempted to account for edible corn that simply was no longer there. This information was compounded into the graph below:

Source: Lagi, Gard-Murray, and Bar-Yam

Corn price (blue line) and curves showing the causes of price increases according to our quantitative model (red dashed line). The green dashed dotted line is the supply and demand equilibrium impacted by the demand shock due to increasing corn to ethanol conversion. The quantitatively modeled speculation contribution to prices is the difference between the total and the supply and demand curve. The corn price without ethanol shock or speculation would be essentially constant (black dotted).(Lagi, Gard-Murray, and Bar-Yam)

The Cycle

The problem grows. The more ethanol is produced and the more corn prices climb, the more import-dependent countries have to pay (both literally and figuratively). This is compounded by the vicious cycle of available funds; the more money is spent trying to combat the effects of a problem, the less money is available to fix that problem. Thus, as prices climb, the struggle to institute positive policies and programs grows more cumbersome. Additionally, while import-dependent countries such as Mexico are suffering from these effects, exporters are benefitting; in other words, the poor get poorer while the rich get richer—and so long as the top dogs keep getting the best bones, it’s not in their interest to effect change. This forces countries such as Mexico into a dependent spiral that deepens with each turn, and if exporter countries do not put aside their thoughts of personal gain to try to bridge this gap, import-dependent countries will be left attempting to sort out an international problem on a national level.

The Solution

So what should we do? Where should we turn? The key thing to remember is that biofuel isn’t the problem; corn ethanol is. We can still combat global warming, prevent the drying of oil reserves, and ensure a brighter future for our planet through renewable fuel sources. One option, derived from algae, is biodiesel.

As stated in the video, biodiesel kills two birds with one stone, being a feasible replacement fuel for industry, while removing harmful carbon dioxide from the atmosphere via the natural biological processes of algae. Algae is hardy and may be produced and converted to biodiesel both quickly and in mass quantities, despite taking up comparatively little space. Granted, personal vehicles are not often diesel-based; however, the rise of electric cars and hybrid vehicles may be promising alternatives to ethanol-based fuels. There are ways to save our planet that do not involve harming its inhabitants; it’s past time we start using them in earnest.