Corn, Tortillas, and Ethanol

In this post I am going to write about how the U.S. government meddling in the economy has created some nasty unintended consequences.

It is well known that corn prices have gone through the roof. A bushel of corn is around $3.40, which is the highest its been in more than a decade. The main cause of this is ethanol. Before ethanol, corn was already a highly subsidised commodity. Now corn happens to be the highest subsidized service/good here in the United States.

Currently, 14% of the corn grown here in the United States goes to producing ethanol. If you haven't heard, there is to be a huge influx of new ethanol plants by 2009 created with government assistance. If they reach there target for 2009, then 90% of the corn produced in the United States will be used for ethanol. This is absolutely ridiculous and shows exactly why ethanol is a political scam, directed at the naive American, to get senators and other figure heads into office. It is obvious that, at this rate, we will come to the point where there won't be enough corn for food anymore. Ethanol IS NOT a solution to our energy problems.

The interesting thing is that even though our ethanol production, as well as other means of alternate energy, increase exponentially every year, they also count for less of a percentage of our total energy every year. In other words, our increasing use of alternate energy is not increasing as fast as our demand for energy is increasing. So if you think that the United States will put 90% of its corn into an alternate energy source that will not decrease our reliability of foreign oil, your crazy. I hate to reiterate this point, but like I said, ethanol is not a long run solution.

So, once again, I'm sure you're staring into your computer, in a cold sweat by now, thinking, "what should we do?!?" I can just shake my head in shame and reply, "I don't know. It's too late." To really protect ourselves from this problem we should have seriously started taking action 10-15yrs ago. The government would rather postpone the inevitable and not inform the public of the coming crisis in order to make it appear as if everything is hunky dory. There still doing it to some extent today. I'm sure that everything will be fine some day. In the mean time we will be forced to deal with $100-$150 /barrel for oil.

Enough of that gibberish for a second. I would like to look at the affect of our government influence for the futile solution to our energy crisis. Like I said, the price of corn has sky rocketed. Back to microeconomics, when the input prices of a good increase the output price of the good increases as well. Let's head south of the border...Mexico. Beautiful beaches, cabanas and palm trees. A wonderful vacation destination if I may say so myself. The president of Mexico Felipe Calderon signed an accord on Thursday to "curb soaring tortilla prices, as the corn tortilla is the basic staple of Mexican diet and especially crucial for the poor." That's what he said publicly, but I believe that he had a few, choice, 4-letter words, in private, regarding the U.S. government. This is because we are the reason for the soaring corn prices therefore corn tortilla prices as well. The past 3 years, the price of corn tortillas in Mexico has grown on average of 14% /year. That 3 times the inflation rate in Mexico. Ouch.

Side point: I would like to point out an important lesson regarding inflation here. The poor are always the first victims of price inflation that always following a monetary inflation. Remember the poor are many while the rich are few. This makes the rich (and all their political friends) quite nervous.