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