What Tortillas Can Tell Us About Free Markets
Posted in Random Thoughts by R Lee Wrights on February 12th, 2007 by BetteRose Ryan
The Free Market tends to be a wispy, tenuous idea that we often have trouble corralling so others may see it. No matter what we say or what example we use, others can usually point to it and say “That’s just a conjecture.”
The week of January 15th gave us a little real world example on how government, in its effort to help by controlling the market, actually hurts those who are on the bottom half of the income scale.
Tortillas are a main food staple in Mexico. People consume an average of ten tortillas a day according to a recent NPR news story. That same story says the cost of tortillas has risen to over 50% in some areas of Mexico, with other area prices going almost as high. So what is the cause of this? With everyone saying everyone else is to blame, all one really has to do is take a look at what the government is doing to find the real cause.
First, the government of Mexico worked out some deals years ago that allowed Gruma to obtain 70% of the market share in the tortilla trade. You might think that Gruma then could fix the price of tortillas. You might be right. It is something the government is investigating. After all, Gruma has already had to go into court to prove itself in the US when other tortilla manufactures complained about the loss of ’shelf space’ to Gruma. If you wonder who this company is, you might know them as Mission, one of their family. But who allowed this ability to set price? The Government made it possible. It is not just the price of tortillas that gets set by this manufacturer of tortillas and corn flour but also the price paid for raw corn.
Second, Mexican government entered into the North American Free Trade Agreement. How can this be anything but good with a name like Free Trade? It seems this agreement allowed the corn producers of the US to sell their product in Mexico. Okay, not so bad maybe, except that corn is subsidized in the Untied States. Taxpayer money is used to keep the cost of producing the corn artificially low. This caused a great many of the small farmers in Mexico to go out of business. In fact, many of them left their farms in Mexico to work illegally at farms in the US. This caused a shortage of corn produced in Mexico. The government once again was the prime actor in this.
Then comes the ethanol rage. Corn in the US is no longer headed to Mexico but to US ethanol plants. Let us not go into the fact that the government has mandated the use of these fuels and how that affects the market. Rather, keep in mind that without US corn, Mexico now has a corn shortage.
Finally, there is good news for the small farmer. He can return to Mexico, restart his corn-producing farm and make a livable profit even with Gruma holding 70% of the market. This will enrich the small farmer and lower the number of illegal aliens in the US, right? Wrong! Once again, the government is planning on stepping in and helping by bringing in corn at the lowest possible price from any other country it can. This is bad news for the small farmer, since he won’t be able to compete; good news for the person who purchases the tortillas, at least for the time being; and great news for Gruma, who can set prices at whatever it chooses free of market competition.
The lesson in all of this is, the government started the problem, the government made the problem worse, and the government continues to worsen the problem, all the while hurting the very people it claims to be trying to help.
So what would have happened in a true free market? Gruma may have been able to get a large share of the market but not for long. If Gruma raises prices too much, it will encourage other tortilla makers to compete with it because profit is high. If it presses corn prices down too far, again, other tortilla makers will be encouraged to compete because costs will be low and profit will then be high. There will be competition provided the government has not passed laws to prevent this competition.
What about NAFTA? If it were truly a free trade agreement, one would have to remove any items that were subsidized from the trade list. Mexico’s corn market would not have be affected by the influx of cheap corn, which ran farmers out of business, nor by the removal of that corn, which caused the price of corn products to skyrocket. Free trade should mean trading of products free of government subsidies and other government interference.
Nathan said,
February 13, 2007 @ 3:45 pm
Nice article, BetteRose!
Best, Nathan