The Tortilla War

Was the increase in tortilla prices in Mexico inevitable? Is it just a coincidence tha the price of tortilla increased dramatically one year before corn flows freely from the US to Mexico? or was it a carefully planned strategy to justify NAFTA? These questions surely puzzle the minds of many. Let’s us consider what has happened in the market of corn, and in the market of tortilla.

According to experts, there has been a large increase in the global demand of corn; due in part to an unanticipated interest in the production of alternative fuels. If market forces are to work the way they should, the increase in the demand would lead to an increase in the price of corn (notice that, just for the sake of argument, we do not distinguish between yellow corn and white corn). In turn, since corn is used as an input in the production of tortilla, the price of tortilla can reasonably be expected to rise. Thus, the increase in the price of tortilla should not be surprising. An increase of 400%, however, is unjustified. How did the price of tortilla in some places managed to go up by triple digits? The answer can be found on the supply side of the market. If in addition to the increase in the demand of corn there is a decrease in its supply, then the price would increase substantially; and this is apparently what happened. Large suppliers of corn and masa are believed to have engaged in speculative behavior, cutting the quantity of corn available in the market.

Is there a role for government intervention in this case? Maybe, perhaps the government should crack down those speculators and allow corn and masa to be freely supplied in the market. The immediate response of the Mexican government was, interestingly, to increase the supply of corn by importing corn from the US. The result of this policy, and some actions to prevent speculation, was a considerable decrease in the price of tortilla (in fact, government, industry and consumer representatives signed an agreement to “keep” the price of tortilla at some reasonable price, but this arrangement is not really part of market mechanics). At the end, the “solution” to the dramatic increase in the price of tortilla was importing corn from the US. Hence, the perception of many nowadays, especially consumers, is that importing corn from the US is “good”.

Those who oppose NAFTA have surely found a scenario whereby a Machiavellic conspiracy suggests that the whole incident of the increase in tortilla prices was fabricated to create a “good” perception of importing corn from the US. That is, given that corn producers in Mexico complain (with reason) that the implementation of NAFTA allowing corn to be imported into Mexico with no restrictions will devastate the domestic industry, let at least consumers be happy about it. This Machiavellic mind is trying to create the popular belief that trade with the US benefits most, especially the poor whose primary staple of consumption is tortilla.

How likely is this theory to be true? Not very likely, if we think about it, importing corn from the US is only natural, Mexico is already importing large quantities of corn; policy makers simply increased the quota to face the recent situation. The fact is that Mexico’s corn industry has failed to become competitive; whether the responsibility of this lies in the shoulders of producers or policy makers is not clear, and is not relevant. With or without a tortilla crisis, starting January of 2008 Mexican corn producers will have to compete with US corn producers, how will they fair? It remains to be seen.