I know I should not base any arguement or reasoning upon something I hear on prime time television, but this has been wandering around my brain for a few weeks now.
During an episode of “West Wing” one charactor commented that without government subsidies of farmers produce prices would increase an incredible amount.
So is this true? Do government subsidies of farmers cause the prices of produce to be artificially low? I always figured that these payments were some sort of agricultural welfare.
No cite for you right now, but I’m given to understand that wholesale prices for corn are lower than the cost of production. If that’s true, then the primary producers would have to more than double their prices to make a reasonable profit …
Thanks for your responce SCSimmons. I agree that the wholesale price is most likely lower than the cost of production. I see the enormous hills of grain outside the elevators around here and I just wonder what’s in it for the farmer. Why are we paying them to overproduce?
Because otherwise the cherished farmer way of life would disappear.
These price supports do tend to ‘creep’. I think some were put in place when there were food shortages, others during the oil shortages of the 70’s (to make cheaper ‘gasahol’, which is based on gasoline and grain alchohol), etc. Then, when the crisis passes, nobody dares reduce the subsidies for fear of ticking off the farm lobby … This might actually be a good question for Cecil. If anybody can get to the bottom of it, Unca Cec’ can!
(You’d be amazed how these particular price supports filter through the economy, too. Check out the price of grass-fed beef, if you can find any … corn oils and alchohols have numerous industrial uses as well.)
Not exactly, it’s more like because the cherished agricultural industry would disappear.
Here’s the assumption. Farmer’s cost of production for a bushel of corn is $2. Open market price for corn is $1.95. But the “loan” (or subsidy) price for corn is $2.15. The farmer sells two bushels of corn and forfeits one bushel to the loan program, thereby getting $6.05 for corn that cost $6 to produce.
Take away the subsidy program. Farmer goes broke and a) sells to megafarmcorp which may be able to grow corn for $1.94, b) sells to a land speculator, removing that land from production permanently or c) goes bankrupt, leaving the land to the bank, which may not find either a land speculator or a megafarmcorp willing to buy land in that area.
One important thing to remember is that land to a farmer is an asset that must be used. A cattle rancher or dairy farmer can, within limits, expand or reduce the herd to match market demand. But land is a fixed expense, whether it’s used for a crop that year or not.
The other thing to remember is that if production stops, the infrastructure in that area also stops. The grain elevators and feed mills close. The infrastructure is harder to rebuild than just taking land out of production.
A real life example of this happened in the mid 1970s. Congress allowed the sugar subsidy (it was also a program to limit imports) to expire. Three things happened:
Foreign governments dumped their own subsidized sugar into the U.S., causing prices to plummet.
Domestic sugar producers, particuarly in the north-central states, went bankrupt, and the mills and related industries went bankrupt along with them.
The price of sugar then skyrocketed as other producers took advantage of the decline in domestic production to raise prices.
All of this may be brutally efficient from a free-market standpoint, but remember one other variable. In the U.S. and most other countries, some inefficiency in food production is valued, in case of drought, blight or an interruption of foreign imports. (The last rationale is particularly evident in Europe.)