Is the increased production of ethanol in the U.S. rising the cost of tortillas?

Response:

This is a case of misinformation and fear mongering. The true story is rising tortilla prices in Mexico are due to a supply issue in that country – not increased U.S. ethanol production or U.S. corn prices. Last year there was lower corn production in Mexico and the lack of import licenses have caused white corn shortages there. The U.S. ethanol industry uses yellow corn, not white corn. White corn is used for tortillas not yellow corn. Industry representatives in Mexico have indicated that requests for import licenses were made to the Mexican government starting in August 2006. Licenses were issued in January for February imports. In the near-term, the white corn supply should improve. Additionally the country experienced a 1.2 million metric ton (47.2 million bushel) reduction in corn yields due to drought in 2006. Mexican farmers produced 22.5 million tons (885.8 million bushels) of both white and yellow corn in 2005, whereas production dropped 5 percent to 21.3 million tons (838.5 million bushels) in 2006. Farmers in Mexico have responded to higher prices by planting more white corn. Mexico is a substantial customer of U.S. corn – having imported 10.5 million tons (413.4 million bushels) in the 2006 calendar year. However, of that volume, only 253,000 tons (10 million bushels) was white corn. Let’s look at the prices a little closer…U.S. corn prices did rise in December to levels the U.S. has not seen since 1995 and ethanol usage accounted for a large portion of the increased demand for corn. Tortilla prices increased 20 percent during this time. Country elevators in the U.S. saw corn prices go from $1.75 to $3.60 per bushel. On a per-pound basis, corn increased from 3.3 cents per pound to 7.3 cents. Tortilla prices rose from 34 cents per pound to 41 cents. So U.S. corn price increases did equal about half the rise in tortilla prices. But raw corn is only a fifth of the total cost of a tortilla. There is more to the story, however. Just as the Fed’s rate increases were from an abnormally low base, so was the rise in corn prices. In May 1996, when U.S. consumer prices were 23 percent lower than they are now, corn prices reached $4.66 per bushel. Over the last decade, they averaged about $2.20 per bushel. In historical context, recent price increases are not a dramatic as they seem. Moreover, as U.S. corn prices drifted lower from 2003 to 2006, there was no corresponding decrease in Mexican tortilla prices. Something is going on beside the ethanol boom.

 

For more information on E85, check Frequently Asked Questions.