Why do we pay farm subsidies and what do they do to the prices of certain goods?

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Why do we pay farm subsidies and what do they do to the prices of certain goods?

In: Economics

The most reasonable justification for farm subsidies is that it encourages an overproduction of food. Normally in economics, overproduction is a bad thing because producers take a loss on some of their product. But in the case of farming when production can be affected by yearly weather differences, having farmers aim for a market clearing production level only to fall short due to the weather would lead to a food shortage. In this market, a food shortage is way, way worse than overproduction, so the government pays a subsidy to encourage overproduction. This has the effect of keeping the price low and the people fed.

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A more cynical case could be made that these farm subsidies are generally unnecessary in the United States, since much of our farming is done by a handful of very large companies. Since these companies farm over a vast range of territory, the risk of under or overproduction due to yearly variation in weather mostly evens out, so this subsidy looks more like a corporate hand out

It’s a national security purpose to keep a large share of agricultural production active domestically. Otherwise a lot of core agricultural products would never be grown in country.

There are several reasons.
I will try to keep this at a level that is easily understood.

The most optimistic reason that has yet to be mentioned is a macro economic productivity effect.
By introducing subsidies, it helps control the supply of the commodity. If you control the supply, you can greatly help control the price. This helps for several reasons. It helps farmers (I’ll come back to this); and it helps the general public.

The general public is helped because the price of basic food staples becomes more stable. Think of it this way, everyone has to eat. Well if you don’t have a lot of money, you want to make sure you’re getting the most for your money. However, if you’re constantly comparison shopping and constantly watching the cost of basic food supplies the way wall street and forex traders or more currently crypto traders watch and react, you can potentially be losing money. If you save $5 spending an hour comparison shopping, but you could have made $15 dollars in an hour of working, you’re still money ahead going to work and paying more for groceries.

Farmers likewise can benefit. Instead of boom / bust years wherein commodity markets tank because everyone grew their biggest yields ever, they can actually make a greater margin of profit by having an artificially limited supply. Laymen’s terms, because there is less total of a crop, they can sell their crops for more money.

Personally, even though I am probably the biggest libertarian free market capitalist you ever met, it’s one of the few macroeconomic models that has been proven to work. I like knowing that a gallon of milk is very typically between $2-$3. I like that a cheap loaf of bread is $1-$2, and that ground beef is typically $3-$4. This to me is like a bit of a social safety net. However, you may have noticed the global pandemic has changed this a bit.

People who are against subsidies often argue that it somehow hurts production and limits the supply of low cost food. Their partially right, but overall wrong. Yes, subsidies lower the total amount of food stuffs made, but hunger is more typically a logistics and distribution problem and not a production problem. Even with subsidies, the US is capable of feeding a much larger population. It’s getting the food to people that need it, and getting people out of their own heads about “good” food, and liability about food donation.

Subsidies help optimize food production because farmers know their yields. Just like manufacturers know how many widgets a given manufacturing / assembly line can produce in a set time frame, a metric fuck ton of agricultural science goes into predicting how yield a given field will produce in a growing season. If a farmer has a field that would be “good” but not “great” they might be better off taking the subsidy. However, if they think they can do better than the subsidy they may try to grow and harvest a given crop.

Btw, an interesting case study for this is playing out in real time for you. The demand for cannabis greatly outpaces the current supply. For decades it has been an underground cash crop. Have you seen what happened to hemp production once it was legalized? Can you imagine what will happen with cannabis plants that have thc? Farmers will absolutely give up on some of their existing crops and switch over to hemp and cannabis which may for a time flood the markets, if that happens within a relatively short amount of time, the US will go from legalizing cannabis to actually subsidizing cannabis farmers. It’s always funny how that works.

Politician says to the farmer “Hey vote for me I’ll give you money.” Farmer says to the politician “Yeah okay.” City boy says to the farmer and the politician “Hey what the fuck?” Farmer says “You don’t want to starve, do you?”

City boy is concerned that he’s being taken for a ride, but he doesn’t know enough about farming to know if that’s true. Plus there are way more farmers than city boys, and they’re super poor while city boy is super rich. So he lets the politician take his money and give it to the farmer, so that the farmer won’t grow food, so that the city boy… won’t starve…

Flash forward a hundred years or so. The politician is taking the city boy’s money and transferring it to an agricultural corporation now. The city boy is sure this isn’t helping him avoid starvation, since other countries like Australian eliminated farm subsidies and it didn’t do dip to their food supply. But now when the city boy’s politician says “Hey let’s eliminate this welfare for corporations,” the rural guy’s politician says “If you want to cut welfare, let’s start with the welfare that goes to poor people.” City boy says “You’re crazy, those guys actually need it.” And so the status quo is maintained.