Ethanol, NAFTA, Tortillas and Walmart?

Quick, what do Ethanol, NAFTA, Mexican Tortillas and Walmart have in common? Don’t know? Well here’s the story.

I am fascinated by the discussion about ethanol feedstocks issues. There has been a lot of talk about corn production for ethanol either crowding out beef or food production, or driving up the price of food, or failing to supply the demand for ethanol.

I have stated before on Cleantech Blog and other sites that I believe corn is a lot more substitutable than the anti-ethanol and cellulosic ethanol advocates give it credit for. Our take: that the corn price rise from ethanol demand will not be as steep as the worst case, that the industry will find more acreage than expected for corn, and that costs will fall, in part because corn producers (and beef producers) are highly flexible and relatively global. Also that cellulosic processes are a lot harder and will take a lot longer to make economic than expected, and that the end result will be corn ethanol for a long time.

But the subject just keeps rolling – quoting an Inside Greentech interview with David Aslin of 3i:

“Leaving the issue of food substitution out for a moment, as your article pointed out, the sheer acreages that are going to be required are daunting.

There was a dramatic increase in 2006 in corn plantings over the prior year, and the industry forecasts an additional 10 million acres in 2007 in response to the need for fuel. How much of that is going to be available for food if all these ethanol plants being constructed actually come online, and at what price? (Heck, there’s way too much corn syrup in U.S. food industry products anyway, so if we take a bit of the excess sugar out of people’s food, that won’t be a bad thing for the nation’s health!)”

At the same time, we have also been saying that corn ethanol is inherently a high cost fuel ($1.50-$2.50/gallon direct cost on a btu basis compared to $0.50-0.60/gallon for gasoline on a direct cost basis – read our blog, and please don’t email me arguing the price of crude is over a $1/gallon, it’s the COST of finding and producing that crude, not the price the oil companies can sell it at, that matters), with lots of new supply coming on that is going to hurt the economics of US ethanol producers like VeraSun, Aventine, etc.

But this is a whole new angle – the political ramifications of our ethanol industry driving up prices for our neighbors food supply.

One of my friends, the CEO of a fuel cell startup who happens to read Cleantech Blog, emailed me an article today. Basic gist – the Mexican government is concerned that ethanol demand is driving up the price of tortillas! And is trying to decide what to do about it. As they describe the impact:

“Prices for white corn used to make tortillas have been hit the hardest. Although local corn prices are typically volatile around harvest time, which mostly falls in the second half of the year, traders say the farm gate price for white corn saw an unprecedented rise of up to 45 percent in 2006 compared with the year-ago levels in the Mexican market.

Grains traders have forecast tortilla prices to rise between 20 percent and 25 percent during the last quarter of 2006 and the first quarter of 2007. “

My friend’s commentary on the subject:

“Even more funny, in the story I heard on NPR, Wal-Mart Mexico is taking advantage of the tortilla price run up to undercut independent tortilla shops. But besides the humor, there may be something here. I think the Mexican government is just out in the lead. I’ve seen at least one piece predicting that additions to ethanol production have been under estimated and that significant corn feedstock shortages will occur in 2008.”

Now, nobody’s talking NAFTA yet, but one of the things free trade does is globalize commodities. I’m just waiting for the next reverse “giant sucking sound” attack on NAFTA to follow this corn price rise. Or worse, some blogs are bound to start complaining that corn ethanol is racist, and anti-Mexican. To an economist like me, this price rise is just a perfect example of how globalization can even out the impact of something like ethanol demand on corn prices by spreading the effect across multiple markets and multiple commodities (and drive a new energy commodity export business – see our recent blog) – an example of my point that corn ethanol has longer legs than the cellulosic guys would like. But I’m sure that’s not how it’ll get reported.

Though you do have to admit – our ethanol craze could make Mexican tortillas too expensive to eat? That’s kind of funny.

Author Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding contributor of Cleantech Blog, and a Contributing Editor to AltEnergyStocks.com.

8 replies
  1. Anonymous
    Anonymous says:

    Just 1 comment / question. Do the farmers get the same subsidies for the food crop corn as the ethanol corn. If so maybe the subsidy for the ethanol corn should be dropped.

  2. Neal Dikeman
    Neal Dikeman says:

    I will stand ready to be corrected, but I believe corn farmers can receive a range of subsidies regardless of where the production goes (ethanol, food, or animal food), and that the ethanol subsidies (c. $.50/gallon or about the same as the direct ocst of gasoline manufacture), comes on top of that but is paid to the producer/distributors of ethanol, not the corn farmer directly.

  3. Anonymous
    Anonymous says:

    I have been harping on this ever since my verasun shares tanked two days after the IPO. I wrote everyone that had a web address to point out that the original reason we have twenty million Mexicans here is that we crashed their corn market with Nafta. Somehow it never came up in any ethanol discussions that our neighbor has enormous and unused corn growing potential. It also seems to escape the ethanol bashing crowd that we can expand our own sugar production in Texas, Louisiana and Florida, that we can take our cotton acreage out of production and import it from people who really need to sell it, such as western Africa. The Carribean economy can also be revived with sugar, and we can actually drop our own subsidies and tariffs for the crop, if we use it for ethanol. This would actually help, rather than destroy our negotiating positions at the next Gatt round if ever there is one. Ditto Kyoto. Logic is not the currency of the ethanol bashers – theirs is the coin of the shill – Exxon, GE, Westingouse, well the usuals. Good article, Neal. V Gelfand

  4. Keith R
    Keith R says:

    Charles Morand at Atl-Energy Stocks blog suggested that I re-post my 19 Jan. comment there to your piece here:I doubt that the Mexicans would consider it funny — they are deadly serious about corn issues (example: Goggle "biotech" "GMO" + "maize" + "Mexico" and read the pages upon pages about the controversy in Mexico about American genetically engineered corn purportedly endangering Mexico's food security).Maybe there is an angle to this you have not considered. Tortillas are a staple of the Mexican diet, and corn tortillas are central to the diet of the poor in Mexico — the people least able to deal with price rises due to "gloablization evening out the impact" of ethanol demand. More prosperous Mexicans tend to eat (wheat) flour tortillas, if they eat tortillas at all.I am not advocating this as a reason for the US not to use corn-based ethanol — I think there are plenty of other reasons, economic and carbon-wise, not to. But I hardly think it qualifies as funny.Personally I think we might be better off removing the tariff and non-tariff barriers to imports of sugarcane-based ethanol. But I doubt the corn lobby will let that happen…

  5. Lewsir
    Lewsir says:

    Keith, excellent point about importing cane. The world's "breadbasket", if you will, for producing bio-ethanol is Brazil. They've got enough grazing land in the South Central to supply a significant share of the worlds gasoline at about $30-40/bbl oil equivalent. Its around half the cost of US ethanol and provides about 3x the CO2 reductions per litre (and a far higher multiple per hectare of land growing the feedstocks). Brazil is a strategic partner to the US and a reliable trading partner. So why is the US banning the imports of Brazilian ethanol? Any corn ethanol proponents want to comment on that one?

  6. Lewsir
    Lewsir says:

    Hmmm, didn't say that quite right (I'm used to being able to edit my posts before final posting, sorry…)I meant to say:Keith, excellent point about importing cane ethanol. The world's "breadbasket", if you will, for producing bio-ethanol is Brazil. They've got enough grazing land in the South Central region to supply (displace) a significant share of the world's gasoline with cane ethanol at about $30-40/bbl oil equivalent. Its around half the cost of US corn ethanol and provides about 3x the CO2 reductions per litre (and a far higher multiple per hectare of land growing the feedstocks). Brazil is a strategic partner to the US and a reliable trading partner. So why is the US banning the imports of Brazilian ethanol? How is what we are doing in any way related to optimal energy or GHG policy? Any corn ethanol proponents want to comment on that one?

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