Tortilla Facts

by Mary Anastasia O'Grady

Mexican President Felipe Calderón has been making an all-out effort to fight the U.S. war on drugs. But now he will have to redeploy forces against a new brand of Mexican criminal: the corn hoarder. Anyone caught stockpiling the ancient Mexican grain can get 10 years in jail.

It's not the higher cost of corn per se that has Mr. Calderón denouncing "speculators" and "hoarders." Rather, it's what rising corn prices are doing to push up the cost of tortillas -- the most fundamental of Mexican staples.

In just a few weeks tortillas have become the issue for the new government, which boasts a free-market agenda. The little golden disks made from corn flour are practically a symbol of national identity in Mexico. As prices have surged -- by at least 30% in most parts of the country -- Mr. Calderón's political opponents are pushing their view that economic liberty is behind this assault on Mexican culture.

Nothing could be further from the truth. The cause of the corn price spike is too much government intervention, not too little, which makes this Mr. Calderón's first big test. Either he moves boldly to liberate Mexicans from the restrictive policies that led to the problem or he caves in to those who demand price controls, more subsidies and a reversal of the North American Free Trade Agreement. If he chooses liberalization, he will establish himself as a modern leader, much as Ronald Reagan proved his bona fides by firing the air traffic controllers. If, on the other hand, he gives in to his adversaries, the defeat could weaken him irretrievably. In that case, his six-year term is likely to look more like that of his predecessor Vicente Fox, who never got much done.

The sharp increase in Mexican corn prices, which fueled the tortilla price spike, followed big price increases for corn on international markets over the past year. The main cause, according to most commodity analysts, was the U.S. decision to subsidize ethanol made from corn. Growers who previously marketed their harvests to food and livestock companies suddenly have new demand from ethanol producers, who are also armed with a subsidy to make their bids more attractive. The increase in demand from government-subsidized ethanol producers pushed up prices.

Yet the U.S. isn't the only government that is distorting markets. Mexico's quota system for corn imports has exacerbated the problem.

In December, Chicago futures markets were already forecasting higher prices because of increased demand. Commodity speculators were anticipating supply problems in the Mexican market and, according to the Jan. 25 edition of the Mexican weekly El Semanario, corn flour makers were ready to pass those costs onto consumers. The only way to reduce the building price pressure would have been to increase Mexican access to international suppliers.

But that wasn't easy to do, thanks to quotas on corn imports. To increase the quotas required permission from the bureaucracy but, according to the El Semanario report, the bureaucrats misjudged the urgency of the matter. At a Dec. 22 meeting, the magazine says, "a representative of the office of the secretary of the economy was present but he did nothing to deactivate the bomb. He elected to confront the crisis upon return from the [Christmas] holidays but by then it was too late."

This illustrates why quotas have to go the way of the dodo if Mexico hopes to be an economic tiger rather than a lumbering dinosaur. Bureaucrats balked at higher imports in December because they wanted to keep corn prices at a certain level and worried that an increase in supply might knock them down. We don't doubt the good intentions of the government officials charged with finding the Goldilocks "just right" amount of corn to import. But that's an impossible task for government. Only the market can efficiently discover the equilibrium that satisfies both suppliers and purchasers.

To turn down the heat on his government, Mr. Calderón is asking tortilla makers to agree to voluntary price controls and promising to punish speculators. Neither step inspires confidence. Price controls, whether they are achieved through arm twisting or the law, tend to cause shortages; if producers are eating losses, they lose their incentive to produce. Speculators play an important role in diversifying risk in the market; they are not criminals, unless of course the government has granted them quota privileges. Which brings us to the crux of the problem: import quotas.

The government raised corn quotas last week but only in an acceleration of the annual import schedule. As such, it's the proverbial band-aid. The way to avoid future mismatches between supply and demand is to end the quota system altogether, something Mexico has to do by next January in any case to comply with full Nafta implementation. Less than a year ago Mexican officials were asking their Nafta partners to "reconsider" the 2008 opening of the corn and bean markets because they feared that local farmers could not compete. But now, as Luis de la Calle, a former Mexican deputy trade minister points out, "The increase in the price of corn in the U.S. means that the vast majority of corn that is grown in Mexico will now be competitive and will not require subsidies to be commercially viable."

Far from being a victim of U.S. ethanol policy, Mr. Calderón can come out the hero. In an environment of robust prices, he can open the agriculture sector with no harm to producers and champion the consumer. While he's at it, he might confront Mexico's powerful green movement, which is blocking the use of genetically modified organisms (GMO) in seed, much to the detriment of Mexican competitiveness and both producers and consumers.

Modernity, technology and competition, not tortilla prices, are why leaders of Mexico's large labor unions and peasant groups have been kicking up a storm against Mr. Calderón and are now promising a mega-march on the capital on Wednesday to demand price controls. Their pretext may be high food prices but their solutions are all about a return to corporatism and protectionism.

So far the government doesn't seem to appreciate the broader opportunity presented by the "tortilla crisis." Mr. Calderón was elected to take Mexico further down the path of modernity. Restructuring the agricultural sector is central to this goal. With consumers up in arms about food prices, the president has been handed all the political cover he needs to take Mexico to the next level of liberalization. If only he has the sense to use it.

Source: Wall Street Journal