Thursday, December 23rd, 2010

The Price of Corn

The Mexican government is using an original tactic to grapple with rising food prices: hedging. The Financial Times (Gated. You’ll need to register) reports that Mexico has insured against rises in the price of corn until the third quarter of 2011.

The move seems smart. Mexicans spend a high share of their income on food — about 27% of family expenditures, compared with less than 10% in the United States. And a big slice of that is spent on Mexico’s staple: the tortilla. Corn prices have already risen by almost half this year. Still, inventories remain low, and traders expect further price increases next year.

The Mexican government is paying for stability. Tortilla makers threatened to increase tortilla prices. The government fears this could lead to social unrest like that experienced during the tortilla riots of 2007, when prices of food sky-rocketed around teh world.

Mexico’s tactic seems superior to other attempts to deal with rising agricultural prices around the world.  In China, where rising food prices have driven inflation to 2-year highs, the government has imposed price controls on many foodstuffs. Other countries, like India, have restricted exports of agricultural commodities. But price controls often lead businesses to hoard food, exacerbating scarcity. Like export controls, they also inhibit investment in food production.

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