The impact of biofuel policy on Guatemala

by on January 10, 2013 at 2:30 pm in Current Affairs, Economics, Food and Drink | Permalink

It is bad:

In the tiny tortillerias of this city, people complain ceaselessly about the high price of corn. Just three years ago, one quetzal — about 15 cents — bought eight tortillas; today it buys only four. And eggs have tripled in price because chickens eat corn feed.

…In a country where most families must spend about two thirds of their income on food, “the average Guatemalan is now hungrier because of biofuel development,” said Katja Winkler, a researcher at Idear, a Guatemalan nonprofit organization that studies rural issues. Roughly 50 percent of the nation’s children are chronically malnourished, the fourth-highest rate in the world, according to the United Nations.

DocMerlin January 10, 2013 at 2:40 pm

Yep. Government subsidies and mandates make people poorer, by moving goods from high valued to lesser valued uses.

ThomasH January 10, 2013 at 5:03 pm

It sure can if you don’t do cost benefit analysis first. It is particularly prone to happen when one subsidizes a substitute for the good one needs to tax to remove an externality. Implication: carbon tax.

Doug January 10, 2013 at 5:54 pm

A tax isn’t necessary as long as Coase holds. To that extent all that’s necessary is strong property rights and low transaction costs.

Even if government economic intervention was perfect and uncorrupted (which is a big if), it’s a relic of 19th century thinking. All government should do is strongly enforce existing property rights, lower regulations and allow freedom of contract to make transaction costs as low as possible.

Externalities will fix themselves as the various effected parties negotiate with each other.. No taxes or subsidies necessary.

DocMerlin January 10, 2013 at 6:52 pm

Even if Coase doesn’t hold, a tax isn’t the best option. It isn’t as if the tax money gets sent back to the harmed. Nor is it even as if the money gets spread out over the entire population.
All a tax does is change one externality for another one.

Lars January 10, 2013 at 8:47 pm

Coase is a lovely distillation of the conservatives approach to economics: “If we assume things we know aren’t true, we don’t have to worry about the negative consequences of our preferred policies.”

Maurice de Sully January 10, 2013 at 9:58 pm

In the context of this thread, your first line is the perfect distillation of the progressive approach to economics. “If we just whine enough about conservatives, we don’t have to talk about how bad our government hurt these people.”

Darren January 10, 2013 at 10:01 pm

A chemist, physicist and economist get stranded on a desert island, with a huge supply of canned baked beans but nothing else. The chemist says that he can start a fire using the neighboring palm trees, and calculate the temperature at which a can will explode. The physicist says that she can work out the trajectory of each of the baked beans, so that they can be collected and eaten.

The economist says, ‘Hang on, guys, you’re doing it the hard way. Let’s assume we have a can opener.’

Lars January 10, 2013 at 11:47 pm

Boy, you really turned that one around on me, Maurice. Are you actually under the impression that liberals don’t like to talk about how our government has hurt foreigners?

Mike January 10, 2013 at 9:43 pm

You can’t assign property rights to the atmosphere. It’s Pigou or nothing in regards to atmospheric pollution.

Ricardo January 10, 2013 at 11:20 pm

Suppose the people who live on the Rockaway peninsula in Queens who experienced extensive property damage in the last storm have a good-faith belief that this storm was worse than it would have otherwise been due to AGW. Who do they sue in the real world and under what legal system? If there is no one they can sue under current law, that means you are advocating a change in the law that provides for a way to adjudicate disputes like this, provides for a court with adequate jurisdiction and that opens the possibility of assigning blame to and collecting damages from large CO2 emitters. Such a radical change in the law sounds like “government intervention” to me. And transaction costs are not going to be low.

DocMerlin January 11, 2013 at 3:28 am

Not more of this nonsense. CO2 caused warming DOES NOT INCREASE FREQUENCY OF HURRICANES. Please don’t repeat this crap.

Doug January 11, 2013 at 3:38 am

They don’t need to sue or even have the right to sue. Go back and read Coase.

All they would do is pay carbon emitters to stop emitting carbon. Or in reality more like the re-insurers who are on the hook for most of the damage would negotiate with the carbon-emitting industries.

Of course this doesn’t happen because the property rights are not clearly defined. Well we have carbon markets or carbon taxes? Who knows. So it makes more sense for the re-insurers to spend their effort lobbying for carbon taxes, rather than negotiating directly in a Coasean way with the polluters.

Decide now once and for all who owns the rights to emit carbon. I prefer to keep it the old way and allow carbon status quo of emitters owning the existing right to release carbon freely. Then the various parties will negotiate based on their actual conviction.

Simple, pure, elegance. No socialism required.

Ricardo January 11, 2013 at 3:57 am

Doug, you are right that I did jump to the conclusion that property owners would have the right to not have their properties devastated by someone else’s alleged negligent actions [and DocMerlin, try reading again and take your hobby horse somewhere else].

That is in fact the “status quo” under the law as it has existed for hundreds of years. If you dam up a river and it floods my property, I get to sue you. Why would it be different if the flooding is allegedly the result of some other environmental practice?In any case, how would reinsurers — or individual property owners for those who do not hold insurance — identify thousands of major emitters and then monitor compliance? What reason is there to think that the transaction and compliance costs would be any less than they would be for a carbon tax?

Lars January 11, 2013 at 5:56 am

“Of course this doesn’t happen because the property rights are not clearly defined.”
Well, that, transaction costs being massively non-negligible, a lack of perfect information, free ridership problems, power disparities in bargaining, many of the victims not having even been born yet and thus unable to stake their claims, and I’m sure a host of other problems, any one of which is fatal to your solution. But you decided the one impediment is polluter’s property rights aren’t strong enough. I wonder why that is.

mavery January 10, 2013 at 2:49 pm

This is why I hate corn ethanol. Well, that and its net impact on carbon levels relative to using oil is negligible. And about 20 other things.

David January 10, 2013 at 2:58 pm

Shouldn’t this just mean that people grow more corn to keep up with demand? Is the problem that they are completely out of land for growing more corn?

axa January 10, 2013 at 3:05 pm

Guatemala is mostly mountains, not exactly the best land for big scale corn growing that leads to lower prices.

Rahul January 10, 2013 at 3:36 pm

Are corn prices substantially influenced by local growing difficulties? Or does trading mean bad-land and good-land regions equalize prices?

Andrew' January 10, 2013 at 3:58 pm

Maybe they should grow more marijuana.

Rahul January 10, 2013 at 3:59 pm

Comparative advantage.

Mark Thorson January 10, 2013 at 3:59 pm

I don’t know about Guatemala, but in Mexico NAFTA drove small corn farmers out of business by eliminating tariffs that protected corn prices in Mexico. Then, U.S. switching from MTBE to ethanol for oxygenation of gasoline raised the price of corn, which in turn raised the price of food made from corn and meat from animals raised on corn. High food prices are the unintended but predictable consequences of these government actions. People starve, but they aren’t our people and they don’t vote in our elections.

Rahul January 10, 2013 at 4:05 pm

>>> in Mexico NAFTA drove small corn farmers out of business <<<

An empirical test of your hypothesis would be if Mexico's area under corn cultivation post-NAFTA is significantly smaller than pre-NAFTA (controlling for time series trends). Is it really? I doubt it.

The "small" vs "big" farmer distinction is irrelevant at least to this test, since the big farmers presumably sell cheaper anyways.

Mark Thorson January 10, 2013 at 6:05 pm

Here’s an article about the devastation of small corn farmers in Mexico as the result of NAFTA:

http://www.mcclatchydc.com/2011/02/01/v-print/107871/free-trade-us-corn-flows-south.html

JWatts January 10, 2013 at 6:19 pm

“Shouldn’t this just mean that people grow more corn to keep up with demand? Is the problem that they are completely out of land for growing more corn?”

In the US, there is plenty of land. Indeed, the amount of land dedicated to farming has gone down over time as productivity has gone up. Farm acreage peaked in the 1950’s in the US and has been declining for 60 years.
http://www.epa.gov/oecaagct/ag101/landuse.html

However, it takes time for farmers to increase the size of their actively farmed land and even more time for new farm labor to be added. So the short-medium term effect is higher prices. In the medium to long term the prices should fall back to there previous levels, perhaps even less if economies of scale are greater

DocMerlin January 10, 2013 at 6:54 pm

Even in the long term we will see an increase in the price from the ethanol. It is because while corn may seem to be close to perfect competition, the products that go into corn production are not.

axa January 10, 2013 at 3:16 pm

…and the little flat portions of land, the owners prefer to plant sugar cane & oil palm that give greater yield than corn to sell locally. Is Guatemala a net importer of corn? That may be the answer to the sensibility of international prices.

mulp January 11, 2013 at 1:10 am

They became a net importer when the trade agreements brought cheap US corn to Guatemala, driving the farmers to sell their land to corporations. Now that corn is expensive, the corporations won’t sell the land back for a price the farmers can afford.

If you were a shareholder in one of the corporations who bought land when it was cheap thanks to cheap subsidized US corn in the 80s, what is most profitable? Selling the land cheap like it was bought? Let the Guatemalans starve and die because they won’t work for your pay and can’t afford to buy your production? Obviously, economically, the Guatemalans need to be eliminated because economy does not demand them.

Emil January 11, 2013 at 2:21 am

What a load of crap. Are you seriously claiming that the (presumably evil) “corporations” that bought the land let it sit idle and that there are no economies of scale in agriculture?

PD Shaw January 10, 2013 at 4:55 pm

Since white corn (human consumption) and yellow corn (biofuels and livestock) are not perfect substitutes, it would be interesting if the NYTimes had dilineated the process by which Guatemala switched from white to yellow, which I am almost certain includes government protectionism and price supports for yellow corn that date back generations. Yellow corn is more difficult to grow than white corn in almost all parts of the worlds (the U.S. has a comparative advantage), but a lot of third world countries want the food security and cash derived from yellow corn.

(Also, a byproduct of corn-based ethanol is livestock food; using corn for fuel does not eliminate its use for food)

PD Shaw January 10, 2013 at 5:42 pm

Or perhaps I should have said I’m not seeing the connection between sugar bio-fuels (which is not a U.S. policy, presumably Brazil’s?), America diverting yellow corn to fuel, and Guatemalans paying 17% more for corn, presumably much of which is white corn?

sort_of_knowledgable January 10, 2013 at 8:36 pm

The article is talking about the rising price of tortillas which is made by yellow corn. And rising price of eggs from rising cost of chicken feed corn.

mulp January 11, 2013 at 1:14 am

It also talks of selling the land to the corporations when cheap corn imports drove the small farmers out of growing corn and other crops.

Now the small farmers can’t afford the crops grown on the land they sold to the corporations, and the wages are too low compared to subsistence farming and starving.

Emil January 11, 2013 at 2:28 am

Ok, let me get this straight…

Cheap corn is not good for the poor farmers and expensive corn is also not good for them. And everything is the fault of eeevil capitalist corporations and free trade. All makes sense

PD Shaw January 11, 2013 at 3:09 pm

I find one of these propositions easier to accept, but not both.

U.S. policy encourages yellow corn production; Midwest farmers react by spending more on fertilizer, seeds, equipment and GPS technology. The result is increased yellow corn production. Plus, since a byproduct of ethanol is distilled grains that can be used for livestock feed, the U.S. is charged with flooding the market by its major competitor (China). I can see that U.S. policy would tend to drive yellow corn farmers in Guantanamo out of business. I simply shrug that its the equivalent of Brazil’s coffee making it difficult for Canada to maintain homegrown coffee.

For white corn, I need a road-map. The U.S. exports white corn, but its a smaller proportion of corn, but still growing. The U.S. doesn’t hold as significant advantage over other countries like Mexico, but Mexico seems to be consuming more as it develops. Perhaps Mexico is bidding up the price as it becomes wealthier? In any event, U.S. policy is hostile to using sugar for ethanol, so if fields of corn are being supplanted with sugar cane, the reason is elsewhere.

PD Shaw January 11, 2013 at 2:45 pm

Why would Guatemala use yellow corn to make tortillas? Yellow corn costs more to produce and requiring more demanding growing conditions. Mexico uses white corn to make tortillas and primarily imports yellow corn from the U.S. for livestock purposes.

dearieme January 10, 2013 at 5:22 pm

Sometimes I wonder whether the Greens are a conspiracy to immiserate Browns.

JWatts January 10, 2013 at 6:20 pm

I don’t think Greens are racist. They hate all human’s equally.

MD January 10, 2013 at 8:35 pm

A lot of environmentalists have turned against corn and soy based biofuels, actually, but now its too late.

Lars January 10, 2013 at 8:51 pm

I’m curious if you can find any major environmental organization that supports corn ethanol.

DocMerlin January 11, 2013 at 3:29 am

They supported it, back when their support got it made into law. Like most laws that create new rents, its almost impossible to get rid of now.

Lars January 11, 2013 at 5:21 am

I’d like some evidence for this. It’s possible, of course, but Congressmen from corn states are why these persist now. Why are you so sure they weren’t the cause then?

Mike January 11, 2013 at 12:29 am

Yeah I’m sure all the browns in Bangladesh are looking forward to global warming.

Rahul January 11, 2013 at 1:25 am

I can understand the White-Greens but how does one explain the Brown-Greens?

Tarrou January 10, 2013 at 7:17 pm

Look on the bright side, y’all. There are some VERY sincere people who felt marginally better about how humanity is treating our dear sweet mother Earth. So some guatemalans go hungry. So some africans starve. You can’t put a price on the vague assuaging of white middle-class liberal guilt.

prior_approval January 10, 2013 at 10:05 pm

Interesting – didn’t someone post this article as a comment in the ‘My favorite things Guatemala’ thread?

And then it apparently disappears (scrubbed?), now reappearing as a post without even the minor courtesy of ‘from the comments’/via/hat tip, with the poster’s name.

Truly a fascinating way to run a blog – and I guess no one really pays that much attention to the comments, as the Alexa data suggested. Or as pure speculation – the new person is still learning the ropes.

jtf January 11, 2013 at 10:30 am

As usual, the New York Times blurs the issues with poor understanding.

It does well to cite the ag econ paper (even though it cites an upper bound estimate for price reductions, and fails to mention it is an empirical correlation only) but lacks understanding of what’s going on in Guatemala. Guatemala has always been a corn importing country. In addition their citation of recent corn price increases is colored by the recent drought, which has also hit corn ethanol hard. Most of all, their biggest omission is to claim that it’s corn ethanol that’s causing the most displacement of land. Guatemala’s problem is oil palm to fulfill EU biodiesel mandates, the same thing that’s causing rainforest to be cleared in favor of oil palm in Borneo. The ethanol in the US doesn’t matter except through indirect corn price increases; the EU market is explicitly under protective tariff to prevent imports of US ethanol (wheat ethanol from Europe has even fewer excuses than US ethanol, I’m looking at you Vivergo) and the US market is essentially self-sufficient in ethanol and biodiesel.

Totio Filipov January 11, 2013 at 10:33 am

It sucks that they can’t just grow more corn. That could solve some problems. But with their terrain that would be really tough.

JCW January 12, 2013 at 8:49 am

So the problems and market distortions of worldwide corn production have everything to do with U.S. biofuel subsidies and policy and nothing to do with the more generalized agricultural and corporate subsidy programs implicit in, for example, the direct-payment and subsidized-insurance systems created by the various iterations of the U.S. Farm Bill.

Riiiiiiiiiiight…..

Comments on this entry are closed.

Previous post:

Next post: