‘Tortilla Riots’ Give Foretaste of Food Challenge

(Via Financial Times)

When the price of corn tortillas, a pillar of the Mexican diet, rose from 8 pesos per kilo to more than 10 pesos in late 2006, people took to the streets.

The “tortilla riots” were the first in a series of disturbances that year to hit emerging countries from Haiti to Bangladesh as the cost of agricultural commodities, including wheat and rice, reached all-time highs.

The Mexican tortilla crisis came after a rise in the cost of corn, itself induced by growing ethanol consumption and booming demand in emerging countries.

Although Mexico was more or less self-sufficient in white maize, used for tortillas, it also imported a large amount of yellow corn for animal feed.

Within a few weeks of the riots, the then-rookie, centre-right administration of President Felipe Calderón managed to contain most of the price rises. Tortilla costs fell back to 8.5 pesos per kilo – higher than six months earlier but still low enough to staunch a popular uprising.

Rush for supplies inflates prices

Corn prices this week hit a two-year high as lower than expected production in the US, which accounts for more than 55 per cent of global exports of the grain, and bad crops elsewhere triggered a stampede to secure supplies, writes Javier Blas in London.

On Tuesday corn traded at $5.55 a bushel, below the all-time high of $7.65 a bushel that was reached in July 2008 but up 35 per cent since the beginning of the year. The US Department of Agriculture said the country’s corn stocks, the most closely watched by market participants, would fall to a 14-year low because of a smaller harvest and rebounding demand.

The rise in corn and other cereals, such as wheat and oilseeds including soyabean and palm oil, has pushed the Food and Agriculture Organisation’s food index to 188 points, nearing the record 213.5 points it hit during the 2007-08 global food crisis.

International grain prices are soaring again. This week corn prices hit a two-year high, and in one session marked their biggest daily gain since 1973. Experts have therefore begun to reflect on the Mexican experience to see if it holds any lessons for other emerging-market countries as they face comparable challenges.

A key part of Mexico’s containment policy was an agreement, reached in January 2007 between government and the corn and tortilla industry, that aimed to keep prices at 8.5 pesos per kilo until the end of April – the start of the spring harvest. The deal was controversial. According to Mauricio González of GEA, an economic consultancy in Mexico City, it awoke fears among liberal economists that Mexico might revert to generalised price controls – with all the distortions that such a system would created.

“The worry was that it could reopen a Pandora’s Box that it had cost Mexico many years and considerable effort to close,” Mr González said.

But many people believe that the government had no choice. Beyond the huge symbolism and importance of the tortilla in Mexico, where more than 21m of the countries 26m families regularly consume them, the political situation required immediate action.

The leftwing Democratic Revolution Party (PRD) had even refused to recognise Mr Calderon as the country’s legitimate president, and vowed a campaign of civil disobedience until price rises were contained.

Then there were the details of the pact itself. To achieve the 8.50 pesos-per-kilo target, large commercial buyers of the grain agreed to sell to the producers of “nixtamel” – the dough from which 60 per cent of all tortillas are made – at no more than 3.50 pesos a kilo.

Chart: Rising tide of corn pricesMeanwhile, corn-flour companies, whose product is used to make about 40 per cent of all tortillas in Mexico, promised to sell at no more than 5 pesos per kilo.

As Sergio Sarmiento, of Mexico’s Reforma newspaper, pointed out , 3.50 pesos per kilo was hardly a sacrifice for the large commercial grain merchants.

They had bought the corn at the equivalent of between 1.20 pesos and 1.45 pesos a kilo a few months before.

“If the purpose of storing the corn during those months was to make a tidy profit, they have already achieved it,” he said of the commercial buyers.

Another concern was that the government’s attempts to keep down prices focused primarily on the corner-shop tortilla makers scattered throughout residential areas – the smallest, yet most visible, face of the industry.

Antonio de la Torre, president of the National Union of Dough and Tortilla Industrialists, argues that the government was monitoring the wrong people. “There is no way that tortilla micro businesses could affect prices because the quantities they move are too small,” he said.

Today, most people agree that an important inflationary factor was the large-scale corn buyers, which held back stocks to take advantage of rising prices.

The hoarding came to an end when the government decided to bring forward import quotas from the US. (The quotas were abolished for good in 2008 as part of the North American Free Trade Agreement.) “That scared the big buyers in Mexico, and they began selling their inventories again,” Mr de la Torre said.

Ultimately, the pact worked. But experts say it probably would have failed had it not been for a bit of luck.

In addition to the decision to allow more corn imports from the US, international corn prices began to fall.

Those two factors have led many economists to conclude that while the government-industry pact provided a short-term solution, it could not have worked had Mexico’s international trade in grain become more flexible. “The government was very fortunate,” says Luis de la Calle, an economist and NAFTA negotiator.

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