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Ethanol: Ruining Tequila For Everyone

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Like it or not, ethanol is proving to have a widespread effect on many different things.

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Reuters reports that Mexican farmers are burning their agave fields and planting corn in its place, as U.S. ethanol demand drives up prices.

They say "the switch to corn will contribute to an expected scarcity of agave in coming years, with officials predicting that farmers will plant between 25% and 35% less agave this year to turn the land over to corn."

Ismael Vicente Ramirez, head of agriculture at Mexico's Tequila Regulatory Council, said, "Growers are going after what pays best now."

The article points out that, despite rapid growth in tequila drinking, over-supply has driven agave prices to rock-bottom levels.

All for a government-subsidized alternative fuel that many seem to think isn't a viable alternative.

I turned to energy expert Ryan Krueger for his opinion:

"There would be no debate without the government subsidy artificially creating one. The more intriguing area to me is the unintended consequences of ethanol- like rioting in the streets around the world when people run out of water and can't afford food."

But, the Senate Energy and Natural Resources Committee seems to think ethanol is the solution. On May 2, they approved a bill that requires 36 billion gallons of "renewable fuel" use by 2022.



Krueger doesn't think this will cut it.

"The true solution-because I don't want to ignore the problem-is pain. The US isn't running out of oil, it ran out of cheap oil. When I was a kid, having a plane ticket was a really big deal-flying was expensive and trips were planned long in advance. Now, no one thinks twice about flying cross-country, only to be picked up in an SUV on the other side. Oil will have to cost a lot more for people to change their habits. Additionally, whatever the US "saves" on energy, it's going to pay for in grocery bills-and at that point, people will no longer talk about taxing big oil for windfall profits made in free markets. Until then, no one will be wondering why their tax dollars are being used for subsidies, which cheat the free markets. Dinner table conversation will change, and the price of dinner will be the force that leads it."



Exxon Mobil CEO Lee Raymond

As for those subsidies, William Anderson of the Ludwig von Mises Institute says,

"When clean air laws demanded major changes in gasoline reformulation in the spring of 2000, there was chaos in many cities, as disruption in the distribution of gasoline caused prices to spike above $2 a gallon. While consumers and politicians (naturally) blamed oil companies, the real story was much more insidious. Taxpayers (and consumers) paid taxes (and higher prices) to subsidize the corn which, in turn, was made into ethanol (also subsidized). The process of adding tax-funded ethanol in huge quantities disrupted the smooth flow of fuel, which meant price spikes-and most likely did not clear the air one whit. In other words, Congress forced American taxpayers and consumers to pay large sums of money for a product that in a free market they would not purchase."

This is not new news. Ten years ago, Stephen Moore, director of fiscal policies at the Cato Institute pointed out that "ethanol's survival has nothing to do with economics or the environment and everything to do with political muscle. Almost 70% of ethanol is produced by America's premier agri-giant, Archer Daniels Midland (ADM). ADM, the self-proclaimed 'supermarket to the world' has spent a small fortune on farming Capitol Hill over the past 20 years. Through programs like ethanol and sugar price supports, it has reaped a profitable harvest from taxpayers. In fact, an estimated 40% of ADM's profits come from government-subsidized products."




As P. Gardner Goldsmith of the Foundation for Economic Education points out:

"With a nonmarket player intervening in the proper flow of capital, prices for everything from cereal to sodas sweetened with corn syrup to poultry and pork must increase in cost. Since the passage of the 2005 energy bill requiring an increase of ethanol production to 7.5 billion gallons, the cost of poultry alone has increased 40%."



No longer a cheap date…

Corn prices have already sparked protests in Mexico, where people are finding out they can no longer afford tortillas-which were subsidized by the Mexican government until 1999, as the country's poor get more than 40% (boy, that seems to be a popular percentage) of their protein from tortillas, according to Amanda Gálvez, a nutrition expert at the National Autonomous University of Mexico.

On January 31, over 75,000 people took to the streets in Mexico City to demand the government to do something about the tortilla crisis.


January's tortilla protest in Mexico City

Hey, here's an idea! How about interfering in the free markets, just like they do in Washington?

Not a bad idea. As part of President Felipe Calderón's plan to do something about high tortilla costs, he gave emergency approval to import more than 800,000 tons of corn from the United States and other countries.

However, just a year ago, Mexico was exporting corn. Calderón's predecessor, Vicente Fox, allowed brokers to export 137,000 tons of corn.

Rafael Rodríguez, finance director of a farming trade group, said the contradictory decisions are proof of government favors to big corn companies.

The price of food is going up.

The price of oil is already high.

Now, the price of tequila-something that can help us all forget about the astronomical price of dinner-is going to go up.

It won't be long until only movie stars are drinking the stuff.

Mel Gibson already does.

When he was pulled over last July for driving 110 mph on the Pacific Coast Highway with an open bottle of Cazadores tequila, he blamed his infamous anti-Semitic rant on the booze.


The demon Cazadores

We can all blame another Hollywood star, Bing Crosby, for making tequila available to Americans in the first place.



In the 1950's, Crosby fell in love with Herradura tequila while on vacation in Mexico and was the first one to import it into the U.S. in large quantities. It was the first brand of 100% agave tequila available in this country, and, had Bing not passed away in 1977, he would have lived to see Brown-Forman buy Herradura in 2006 for $776 million.

Bing had something else in common with Mel Gibson, other than a taste for tequila. He was arrested for DWI in Los Angeles, too-although it was 77 years earlier, during the filming of his first movie, "The King of Jazz."



Unlike Mel Gibson, Crosby crashed his car-which put his date through the windshield. He was sentenced to 40 days and, whenever he was needed on the set, guards escorted him from jail to the studio.

Like it or not, ethanol is proving to have a widespread effect on many different things.

Tequila is just the beginning.

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