Cafe Hayek: Taking advantage of people's need

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January 19, 2007

Taking advantage of people's need

Russell Roberts

Mexico is putting price controls on tortillas to protect the poor from increases in tortilla prices caused by rising prices of corn. The AP reports (HT: Noah Yetter):

President Felipe Calderon signed an accord with businesses on Thursday to curb soaring tortilla prices and protect Mexico's poor from speculative sellers and a surge in the cost of corn driven by the U.S. ethanol industry. The corn tortilla is the basic staple of the Mexican diet and is especially crucial for the poor. The accord limits tortilla prices to 8.50 pesos ($0.78) per kilogram and threatens to use existing laws to achieve prison sentences of up to 10 years for company officials found hoarding corn. Some stores have been selling tortillas for as much as 10 pesos ($0.91) per kilogram.

It also raises quotas for duty-free corn imports to 750,000 metric tons (826,733 U.S. tons), most of which will come from the United States.

The measure is to be reviewed for possible modifications on April 30.

"The unjustifiable price rise of this product threatens the economy of millions of families," Calderon said. "We won't tolerate speculators or monopolists. We will apply the law with firmness and punish those who take advantage of people's need.

Why is corn getting more expensive?

The rise is partly due to U.S. ethanol plants gobbling corn supplies and pushing prices as high as $3.40 a bushel, the highest in more than a decade.

So because of a bad law in the United States (the requirement to put ethanol in gasoline), the Mexicans have decided to pass a bad law that can only lead to a tortilla shortage.

But wait. There's another source of high corn prices in Mexico. Re-read that earlier line:

It also raises quotas for duty-free corn imports to 750,000 metric tons (826,733 U.S. tons), most of which will come from the United States.

Quotas? Mexico keeps out American corn? Wait a minute. Didn't the United States sign a free trade agreement with Mexico, the North America Free Trade Agreement? I guess there was a exception for corn. Or a very slow phase-in. Maybe we should call it NAMTA—the North America Managed Trade Agreement. Or maybe NAFTA stands for the North American Fair Trade Agreement because it protects Mexican corn farmers from unfair competition by American corn farmers.

Getting rid of corn quotas would be a lot better way to help the poor than imposing price controls on tortillas. Maybe President Calderon should spend more time listening to Mike Munger.

Posted by Russell Roberts in Prices, Trade | Permalink

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Comments

Government-regulated tortilla prices? Wow. I have to admit that one wasn't even on the blurry outskirts of my radar.

Posted by: olivier blanchard | Jan 19, 2007 2:11:44 PM

Just an FYI to the Mexican people - flour tortillas also exist. And are much better.

Posted by: Don Mynack | Jan 19, 2007 2:42:39 PM

My second thought when I saw the article was that I knew one of you guys would pick up on it. My first thought was of Mexicans standing in line for their tortilla rations and increased consumption of rice and beans.

Posted by: Randy | Jan 19, 2007 2:54:58 PM

One other reason that the price has risen is that a monopoly has basically taken over the tortilleria industry. A single congomeration owns about 80% of all tortilla production.

The irony is that the Mexican gov't encouraged the monopolization fot the industry about 10 years ago.

The argument used to justify the action was keeping prices down.

Posted by: Adam Malone | Jan 19, 2007 3:00:41 PM

There are some other issues too.

http://www.nytimes.com/2007/01/19/business/19futures.html?ei=5090&en=c70fa786c10da6e2&ex=1326862800&partner=rssuserland&emc=rss&pagewanted=all

"The index funds may be stoking volatility, traders and analysts say, because the agricultural markets tend to be far less liquid than other commodity markets, like energy. Such volatility could lead to higher prices for buyers and sellers of agricultural commodities, including food at the grocery store."

Posted by: back40 | Jan 19, 2007 4:06:19 PM

Were I a purveyor of corn tortillas trying to deal with a price cap, I might consider adapting by making my corn tortillas smaller. Problem solved!

Posted by: Whit Stevens | Jan 19, 2007 4:55:28 PM

Whit,

That's a good point. What I don't understand is why the politicos never seem to ask themselves, "If I was the target of this legislation, how would I respond to it?" Do they really believe that their every word and intent will be followed without question? Anyone who has ever supervised anyone knows better.

Posted by: Randy | Jan 19, 2007 5:40:08 PM

Whit Stevens said: "Were I a purveyor of corn tortillas trying to deal with a price cap, I might consider adapting by making my corn tortillas smaller. Problem solved!"

THe original post had a quote that said:

"The accord limits tortilla prices to 8.50 pesos ($0.78) per kilogram"

Problem not solved!

Posted by: happyjuggler0 | Jan 19, 2007 5:45:25 PM

Interestingly, this came across the wire today:

-- UPDATE 1-Brazil to join Canada challenge of US subsidies --
(Adds background, market data)
WASHINGTON, Jan 19 (Reuters) - Brazil has moved to join
Canada's challenge of U.S. subsidies for corn farmers, which
Ottawa says depress corn prices in Canada, embassy officials in
Washington said on Friday.
Brazil has written to the United States requesting to be a
third party in a 60-day consultation period on the United
States' supports for its corn farmers, said Rob Krystynak, a
Canadian embassy official in Washington.
Earlier this month, Ottawa launched a challenge at the
World Trade Organization against the subsidies, which it says
average almost $9 billion a year. If consultations prove
fruitless, the next step for Ottawa would be to present a case
at the World Trade Oragnization's Dispute Settlement Body.
The challenge, if it moves on to the WTO, would build on a
landmark case from Brazil that forced the United States to
dismantle some of its cotton subsidies.
Canada is also alleging that the United States is breaking
WTO limits on a raft of subsidies, not just for corn but other
staples like wheat, soybeans and sugar, giving the challenge
greater breadth.
Ottawa points to subsidy levels in 1999, 2000, 2001, and
2004.
But corn farmers here have so far shrugged off the
challenge, saying it's politically motivated and largely
irrelevant given current high prices for corn.
U.S. corn futures, which gained about 100 percent in value
last year, hit fresh 10-year highs this week amid continued
speculative buying fueled by solid demand for the grain from
the burgeoning ethanol industry.
On Friday at the Chicago Board of Trade, the front-month
contract for corn was down 5-1/4 cents at $4.07 per
bushel, off its high Wednesday of $4.20-1/2.

Posted by: Mesa EconoGuy | Jan 19, 2007 6:40:22 PM

OK, so I would make my kilograms smaller.

Problem SOLVED!!!

Posted by: Brad Hutchings | Jan 20, 2007 12:47:31 AM

Instead, a business owner might choose to change the ingredients of the tortillas, by incremental substitution of corn for another ingredient, thus keeping to the weight regulations.

Though I am no sure how feasible such an ingredient substitution would be with tortillas.

Posted by: Lee | Jan 20, 2007 5:52:40 AM

When dad was in Stalag Luft 3, the Germans used saw dust as filler.

Posted by: Kent Gatewood | Jan 20, 2007 6:02:02 AM

Russell said: "...Or maybe NAFTA stands for the North American Fair Trade Agreement because it protects Mexican corn farmers from unfair competition by American corn farmers."

What's missing is the critical issue that American (sic) corn farmers are heavily subsidized; meaning that their production represents unfair competition to the Mexican corn market. It's not solely our farmers' doing; they had a lot of help from Congress.

What would the true price of E85 fuel be if not for the corn subsidy? You don't want to know...

Posted by: True_Liberal | Jan 20, 2007 10:51:33 AM

The price-fixing strikes me as quite bad. I imagine there's going to be corn tortilla shortages?

Let's hope we get this cellulosic ethanol going quick. And the Mexicans can, of course, use flour tortillas.

Posted by: undergroundman | Jan 20, 2007 1:03:15 PM

Actually making tortillas smaller would be way to address the problem. Generally, tortillas are sold per tortilla rather than per kg.

Most likely the Mexican Gov't limited the price based on a per kg basis because corn is purchased on a per kg basis. This is most likely leading to a subsidy for tortilla growers when they purchase mexican grown yellow corn.

There are numerous ways to change the makeup of the tortilla including substituting part flour, lowering the fat content, or simply rolling them thinner.

In Mexico tortillas are eaten more as a general bread than what we think of as the use of tortillas. The average Mexican eats about 10 tortillas per day. It seems likely that a shortage will occur and it also seems that it would lead to increase in the usage of other types of bread.

Hmmmm...a black market for tortillas could arise...OR more Mexicans could start making their tortillas "a mano".

Posted by: Adam Malone | Jan 20, 2007 1:47:12 PM

Minor quibble - I don't think the ethanol requirement for gasoline is bad per se - it's not any worse than regulating other mandatory blendstocks to control pollutants. Rather the problem is the distortions in the ethanol market, specifically the 50+ cent per gallon tariff on imported ethanol. Corn prices wouldn't be shooting up if sugarcane based ethanol were importable...but then the point of US ethanol legislation was always about a boost for corn farmers.

Posted by: Kurt | Jan 20, 2007 2:19:26 PM

"What's missing is the critical issue that American (sic) corn farmers are heavily subsidized; meaning that their production represents unfair competition to the Mexican corn market. It's not solely our farmers' doing; they had a lot of help from Congress."

True, but by allowing the importation of our subsidized corn, the price of tortillas in for Mexican consumers will fall.

It is perhaps "unfair" to the Mexican corn growers, but Mexico as a whole can benefit by taking advantage of our artificially low prices.

Posted by: Maxim | Jan 20, 2007 3:48:35 PM

Right allow open importation of US corn - another million Mexican farmers move North to US. But then those costs of fences, health, etc. aren't against the trade issue - they're externalities. You people need to get real.

Posted by: Ray | Jan 20, 2007 6:26:06 PM

I have been re-reading Hayek's "The Road to Serfdom". Interestingly I just read this last night. Pg 122 of the 5th edition

"Most people find it difficult to admit that we do not possess moral standards which would enable us to settle these questions [solving for the "common good" or "social welfare]-if not perfectly, at least to greater general satisfaction than is done by the competitive system. Have we not all some idea of what is a 'just price' or a 'fair wage'? Can we not rely on the strong sense of fairness of the people? And even if we do not now agree fully on what is just or fair in a particular case, would popular ideas not soon consolidate into more definite standards if people were given an opportunity to see their ideals realized?

"Unfortunately, there is little ground for such hopes. What standards we have are derived from the competitive regime we have known and would necessarily disappear soon after the disappearance of competition. What we mean by a just price, or a fair wage is either the customary price or wage, the return of which past experience has made people expect, or the price or wage that would exist if there were no monopolistic exploitation...."

pg. 123
"What the "fair price" of a particular commodity or the "fair" remuneration for a particular service is might conceivably be determined objectively if the quantities needed were independantly fixed. If these were given irrespective of cost, the planner might try to find what price or wage is necessary to bring forth supply. But the planner must also decide how much is to be produced of each kind of goods, and, in so doing, he determines what will be the just price or fair wage to pay. If the planner decides that fewer architects or watchmakers are wanted and that teh need can be met by those who are willing to stay in the trade at a lower remuneration, the "fair" wage will be lower. In deciding the relative importance of the different ends, the planner also decides the relative importance of the different groups and persons. As he is not suppose to treat the people merely as a means, he must take account of these effects and consciously balance the importance of the different ends against the effects of his decision. This means, however, that he willnecassarily exercise direct control over the conditions of the different people."

Posted by: Matt C. | Jan 20, 2007 8:43:45 PM

"The price-fixing strikes me as quite bad. I imagine there's going to be corn tortilla shortages?"

Exactly. They passed a no-hording law but there are other ways to withdraw supply, like not making the stuff in the first place. But since regulation begets regulation we'll probably see that little loophole closed as well.

Posted by: ben | Jan 21, 2007 6:03:30 AM

It seems that some Mexican politicians have more bright ideas on how to deal with higher prices for tortillas.

(In Spanish) PRD and PRI demand an emergency rise in wages. http://www.eluniversal.com.mx/notas/401281.html

The spokesman for one of the opposing parties is calling for decreeing a 40% rise in some wages to make up for rising prices of some basic products.

Posted by: Juan Manuel Pérez Porrúa P.l | Jan 21, 2007 11:10:31 PM

This is actually a very complex issue. Corn along with most basic grains is very heavily subsidized for US farmers. It makes it very difficult for small farmers in developing countries to compete as the profit per hectare / acre is very low. Mexico has traditionally been a huge corn producer starting in the 1980s it became cheaper to import from the US (because of subsidized production) than to buy from small farmers who were the main producers (large scale farming in Mexico tends to be products other than corn). Mexico unlike the US chose to follow the market forces in agriculture and began to allow importation. It has become much more important even more recently, as the PAN Presidency since 2000 has fewer political commitments to rural farmers and has less political need to protect them. This has come to mean that when you eat a tortilla in Mexico city the Corn probably comes from Iowa or Illinois (although there is a company that markets its tortillas as 100% Mexican). When the price jumps for whatever reason it is going to hurt because Tortillas are a basic food for 75% of the mexican population. It is not easy to shift to other breads or wheat tortillas for two reasons: first wheat flour tortillas cost more, and second the tortilla is part of a nutritional niche, wheat tortillas are fine if you eat lots of meat but low income mexicans eat little meet and the tortillas and beans make a complete protein, when mixed with the lime used in processing the corn into flour. Corn Ethanol is another way to interfere in the market mechanism. Corn Ethanol is a stupid fuel, it is more expensive to produce (before the subsidy to the farmer) than the value of the energy it contains (I have heard the claim that more petrochemical energy is usually required to grow the corn [tractors for sowing and harvesting and irrigation] than energy contained in the ethanol produced I dont have the source so).
The problem here is that the system is not a free market in any sense either in Mexico or the US, any adjustment requires other adjustments or it creates hardship, in this case for people who lack the resources to protect themselves, it is important to remember that the minimum wage in Mexico is equivalent to about $4 daily, and many people in informal jobs earn less.
Perhaps it would be better if all the protectionism and subsidy was abandoned on all sides, but it might also be a real concern to abandon food security to the vagaries of the market which really takes into account only one value and respects only effective demand - which the people who are most effected by this situation have least of.

Posted by: Aaron Crowe | Jan 24, 2007 1:30:04 PM

I can't decide whether to go into corn farming or to go into arbitraging tortillas across the Mexican border. The letter would certainly require less capital investment, though the Mexican authorities might arrest me for speculation.

Posted by: pj | Jan 24, 2007 5:05:30 PM

Here's a hopeful alternative. The price controls may be political theater. If the duty free importation is calculated to drop corn prices below the ceiling and keep them there, creating the ceiling has zero economic effect. Like a minimum wage set so low that virtually nobody works for that wage, a price ceiling that is above the market clearing price has utility only in making the economically illiterate feel better that the politicians "care" and "are doing something".

This theatrical solution does not solve the long-term problem of economic illiteracy in Mexico but I suspect that Calderon is much more concerned about revolution in the streets stoked up by his "lost by a whisker" opponent (AMLO) who has threatened revolution already.

Posted by: TM Lutas | Jan 24, 2007 11:30:20 PM

Kurt: "I don't think the ethanol requirement for gasoline is bad per se"

Think again. Oxygenates (ethanol, MBTE, whatever) only help complete combustion and associated pollution reduction in cars manufactured prior to 1984. Today's fuel-injected and heavily electronically managed engines will effectively burn gasoline with negligible unburned residue left, whether there is an oxygenate or not present in the fuel. The engine adjusts itself to the gasoline quality. Oxygenates would be long gone were not for the profit incentive to get Congress to mandate them.

http://en.wikipedia.org/wiki/MTBE#As_anti-knocking_agent

Posted by: El-Visitador | Jan 25, 2007 12:01:23 AM

Agriculture is painfully dependent on land, and the ejido collective-ownership system throws a big spike into efforts to improve efficiency of Mexican farms.

Now, sure, the ejido system has been weakened, and has been since 1991 possible for ejido land to be taken private. But it's still a pain and a half, much better suited for high-margin small-plot development than building an efficient agribiz.

Posted by: Derisive Lunatic | Jan 25, 2007 4:54:30 AM

Could somebody please explain to me just what subsidies corn farmers are receiving now that corn is going for $4.00 a bushel?

I had been under the impression that there were two federal government programs that were relevant, both of them designed to keep the price of corn higher, not lower.

One program allowed corn farmers to sell their corn to the feds for some minimum price. This is similar to the dairy supports program that results in warehouses full of government cheese that is then passed out to people on welfare. Since the market price is now several dollars higher than the government support floor price, I don't think that any sane farmer is going to be selling his corn in that program and the US taxpayers are probably saving millions of dollars compared to when corn was cheaper.

The other "subsidy" program is the famous one where farmers are paid not to plant corn. I think that they are paid something on the order of $50 an acre to take land out of production. Since they can now make more than that growing corn on those acres, that program is also not really relevant as farmers give up the subsidies and plant corn on those acres.

Is there some other direct "corn subsidy" that I am not aware of?

Posted by: Mark in Texas | Jan 25, 2007 7:44:37 AM

Mark, IIUC the farmer needs to sign a multi-year contract to take land out of production. So fewer farmers may be signing up, but we are still paying the ones who signed up in the last few years.

You also shouldn't neglect the issue of a farmer who has little or no intention of ever planting corn on a tract continuing to accept money for doing what he would have done for free.

Posted by: Joe | Jan 25, 2007 2:10:12 PM

Joe

If a farmer never intended to plant corn, then his checks from the government might be more properly described as fraud than as a subsidy. In any event, it seems that the price support program might be described as a subsidy since it encourages farmers to grow corn by removing some of the risk that they face if prices are low but allowing farmers to enjoy the benefits if prices are high. (That makes it the opposite of the "anti price gouging" laws that affect natural gas pipelines where the government taxes away any extraordinary profit if the price of natural gas goes up but allows the pipeline builders and operators to own all the risk if the price goes down.)

I am not sure what the federal government does with the corn that they buy in those years when it is cheap. Maybe they just dump it in the ocean. More likely, they sell it or give it away outside the United States which would serve as a subsidy to people like the Mexican tortilla consumers, but make life difficult for Mexican corn farmers. The Mexican government would likely be in favor of that sort of thing since a lot more voters eat tortillas than grow corn.

If that is what has been going on, the US government has been subsidizing Mexican tortilla consumers as much or more than it has been subsidizing American farmers. I can see how Mexicans would be unhappy about the increase in corn prices ending the use of the price support corn purchases.

In any event, I have a modest proposal that could help:

1) Mexico could allow PEMEX to engage in joint ventures with foreign owned oil companies to upgrade its oil extraction and refining operations. That would increase the supply of oil, lowering its price and making ethanol less attractive.

2) Mexico could encourage the production of ethanol from sugar cane. They could use this ethanol as a gasoline additive to raise octane and reduce air pollution. God knows they could certainly stand to improve the air in Mexico City. This would reduce Mexico's demand for gasoline, lowering the price and making ethanol less attractive in the US. If Mexican sugar based ethanol production grows enough, they could export it to the US, lowering the price here and making the construction of new corn based ethanol plants less attractive.

3) Mexico could propose a NAFTA oil tax on petroleum imported from outside of the NAFTA countries. The proceeds can be used to pay for the medical, education and incarceration costs of NAFTA country citizens in other NAFTA countries. It will also lower the risk of a sudden oil glut like we saw in the 1990s making capital investments unprofitable. With that risk lowered, we will see a lot more investment in capital investment heavy projects like oil sand and oil shale processing. That will lower the price of petroleum (within NAFTA) and make construction of new corn based ethanol plants less attractive. It would also screw Hugo Chavez in Venezuala.

Posted by: Mark in Texas | Jan 26, 2007 8:07:48 AM

Interesting and even insightful comments. The "food for fuel" cry (not debate) has been going on for 2 decades with no factual basis. The % of corn from the national crop utilized directly for human consumption is miniscule compared with that utilized to produce milk, meat, and eggs. As an example, wheat, known as the "staff of life", is produced in the US at the volume of about 2 billion bushels. Corn production ranges from about 8 billion bushels(in drought years) to above 11 billion bushels during normal weather, and trending upward. Corn utilized to feed cows, pigs, and poultry is about 4.5 to 5 billion bushels. Corn sweeteners (used in thousands of processed packaged foods, uses about 2 billion bushels. Above that is surplus to the national needs. Add 2 billon bushels for the international market and the rest hangs over the market to woefully depress cash corn markets. That surplus has found a home in the production of the only near-term alternative to gasoline, fuel ethanol.

My question: how many children to you have of military age, or within 10 (or so) years of that age, to go get the oil needed to sustain the economy to provide for their livlihood and your retirement? Other alternatives are some distance in the future. They include cellulosic materials as a substitute feedstock in ethanol, electricity, hydrogen, ad infitum. All of which take power to produce the power to get you, and others, to work and to provide goods and services that you desire NOW. Don't get me wrong...I do not advocate going to war for oil. I much prefer utilizing whatever national resource we have available to supplement and replace petroleum, even if we risk the non- revolutionary comfort of the wealthy of Mexico.

Take ethanol away to benefit the Mexican poverty stricken, can be seen to facilitate the small number of Mexican families who rule everything down there, and who are exporting their problem (destitute Mexican workers)to the US. By the way, $.78 or $.98 cents per kilo (2.2 pounds) for tortillas is an extravagent price? What does that tell you about the efforts of the Mexican governmenet to act in the interest of their populace?

Posted by: Hal | Jan 26, 2007 8:54:36 PM

With all this going on, it looks like some toy maker, such as Tom Smith, might have an incentive to find a way to make tortillas for under a peso. see http://www.vex.net/~smarry/oldbbs/bread.html
But the toy maker had better watch out!

PS. Hey, Lee, my Dad ate the same saw dust crap at Stalag Luft 3. Big Camp, I guess.

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