Energy Independence? Corn, More Corn

Some news last week provides a glimpse into two topics of interest–  core inflation and unexpected policy impacts.

The Fed and many Street economists focus on core inflation.  One reason is to avoid basing policy on highly volatile components of the consumer basket.  Another is that slowing the economy through higher interest rates may not be a good method for dealing with rising food and energy prices.  In the long run, rising prices in these categories are real impacts for the consumer, whether or not they react nicely to policy levers.

One day last week Mark Haines commented on a chart of corn prices, observing that the soaring prices would have an impact on livestock feed and therefore other food prices.

A subject that I wrote about in my former life as a Public Policy professor was the unforeseen consequences of policy decisions.  Often we seek to solve one problem and may not consider what other problems are caused.  This may be such a case, as news from last week shows.

My brother Steve is a professor at The Ohio State University and is a leader in an important program.  His group helps foreign educators, especially those without a background in free market economies, to develop curricula for high school students.  If you think about this for a moment, the importance is pretty clear.  People who do not have a long tradition of free markets need to develop this understanding.  It may take a generation of experience and education for the process to work effectively.  Steve has made scores of trips to Eastern Europe to help with this process, and also hosted many visiting delegations.  (I helped with one group on a visit to the CBOE.  Try explaining how it is OK to sell an option on something that one does not already own!)

More recently Steve has visited South Africa and last week his group went to Mexico.  On his return, he reported the following:

While we were there, people protested the rising price of corn tortillas.  The
Mexican parliament adopted a max price of 6 pesos per kilo.  The corn tortilla
is a staple of the Mexican diet.  We were told that consumption averages 6
tortillas/day/person.  Prices had gone from something like 4 to 10 pesos/kilo. 
Why?  US corn prices are way up.  Why?  Ethanol!  go figure.

While Mark Haines made a good observation concerning consumers in the USA, the impact in Mexico is more dramatic.  At "A Dash" our economic training warns us against optimism about price controls as a solution to this problem.

Producers eventually respond to higher prices.  We need corn, more corn….