Running header: AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 1

An Economic View on Agricultural Subsidies

Joshua Shane Almony

Community College of Baltimore County

AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 2

An Economic View on Agricultural Subsidies

Agricultural subsidies have officially been part of American governmental policy since

1933, when the Agricultural Adjustment Act was passed as a part of the New Deal that was

implemented during President Franklin D. Roosevelt's tenure (Ford & Flynn, 2016, p.1). Not

long after it was implemented, however, the Supreme Court held that the law was not

constitutional, but the bill was then changed in order to take into account the Supreme Court's

ruling and in 1938, the changed version of the bill was passed and since then, agricultural

subsidies have been maintained by the United States (Ford & Flynn, 2016, p.1). Prior to 1933,

the United States government began attempting to "stabilize farmers’ incomes" during the 1920s

due to a drought that caused some crops to be in very short supply, as well as some crops to be

supplied in excess (Ford & Flynn, 2016, p.1). The market fluctuation created by the drought is

what ultimately led to the agricultural subsidies that were implemented by the government, and

to this day, regardless of whether there has been a drought, the government has consistently

upheld similar practices to those that were implemented nearly a century ago in response to a

drought that occurred nearly a century ago.

To explain how agricultural subsidies could distort the model of perfect competition seen

in the agricultural market, it is first necessary to define what "perfect competition" is: Perfect

competition is "A market structure in which the decisions of individual buyers and sellers have

no effect on market price" (Miller, 2017, p.511). Next, it is necessary to understand what exactly

a model of perfect competition entails: In order for a market to be considered perfectly

competitive, there are four main requirements—numerous buyers and sellers must exist within

the market, products sold within the market must be identical, buyers and sellers must have equal

and total access to all information relating to the market and firms must be able to enter into, and
AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 3

exit out of, the market freely (Miller, 2017, p.511). For an individual firm in a perfectly

competitive market, the firm's demand curve is a flat, horizontal line since buyers will not buy

the firm's product if it is at a higher price than what is set by the market, and sellers will not sell

at a price that is lower than what buyers are willing to pay (Miller, 2017, p.512). An individual

firm in a perfectly competitive market will produce at the "profit-maximizing rate of

production," which occurs where "marginal revenue equals marginal cost" (Miller, 2017, p.515).

From this information, it can be seen that in a perfectly competitive market, the balancing of

supply and demand is crucial to its success.

To explain how agricultural subsidies could distort the model of perfect competition seen

in the agricultural market, it is also necessary to understand subsidies, and specifically

agricultural subsidies in the context of American governmental policy: "A subsidy is a negative

tax. A subsidy is a per-unit payment made either to a business or to a consumer when the

business produces or the consumer buys a good or a service" (Miller, 2017, p.105). Subsidies are

given by a government to "lessen an associated burden that was previously levied against the

receiver, or promote a particular action by providing financial support" ("Subsidy," 2018). "The

U.S. government presently pays about $25 billion in cash annually to farmers and owners of

farmland" (White, 2018). There is a total of eight types of agricultural subsidies given out by the

United States government—crop insurance, agriculture risk coverage, price loss coverage,

conservation programs, marketing loans, disaster aid, marketing and export promotion, and

research and other support (Edwards, 2018). From this information, it can be seen that

agricultural subsidies are expensive and, more importantly, are likely to have a significant effect

on the perfectly competitive agricultural market.

AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 4

Now that perfect competition and subsidies—specifically, American agricultural

subsidies—have been fully explained, it can now be addressed how exactly agricultural subsidies

could distort the model of perfect competition seen in the agricultural market: Because the

American government gives payment, in different forms of subsidies, to firms in agricultural

markets, four major changes will have occurred in the agricultural markets—marginal cost of

production is lowered for firms in agricultural markets, supply of agricultural products increases,

prices are lowered for buyers within the agricultural markets and firms in the agricultural

markets receive larger revenues (Welker, 2011). Marginal cost decreases for firms by the

payment amounts from the American government. Supply increases since firms are able to

produce more at a lower cost based on the specific amount given by the government. Prices are

lowered for buyers since the supply curve shifts to the right due to the subsidies. The last effect

of the subsidies is that firms receive larger revenues, since they produce more at a lower price. It

should also be noted that since agriculture is subsidized by the government, an incentive is

created for more firms to enter into the market.

To explain how American corn subsidies hurt Mexican farmers, it is first necessary to

discuss the aforementioned corn subsidies: In 2017, 14.6 billion bushels of corn were produced

("World of Corn," 2018), a large portion of which would seemingly have not been produced if

corn subsidies did not exist. Also, in 2017, 14.28 billion bushels of corn were consumed ("World

of Corn," 2018), leaving a surplus of more than 300 million bushels of unused corn. From 1995-

2016, "corn subsidies have totaled $106.0 billion" ("EWG," 2017). From this information, it can

be concluded that the subsidies given to corn producers have been very expensive and have led

to incredible amounts of corn production and corn surpluses.

AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 5

To explain how American corn subsidies hurt Mexican farmers, it is also necessary to

first discuss the North American Free Trade Agreement: The North American Free Trade

Agreement (NAFTA) was first conceptualized by President Ronald Reagan during his first

presidential campaign (Amadeo, 2018b). NAFTA was first negotiated by President George H.W.

Bush and was signed into law by President Bill Clinton (Amadeo, 2018b). NAFTA was fully

implemented on January 1 st, 1994 ("NAFTA," 2017). NAFTA eliminated all tariffs and trade

barriers between the United States, Canada and Mexico ("NAFTA," 2017). NAFTA was

implemented in order to make the United States, Canada and Mexico "more competitive in the

global marketplace" (Amadeo, 2018a). With NAFTA, however, came unintended, unforeseen

consequences for Mexico.

Now that corn subsidies and the North American Free Trade Agreement have been fully

discussed, it can now be addressed how exactly America's corn subsidies hurt Mexican farmers:

The "USDA estimates Mexico’s 2016/17 corn production at a record 26.0 million metric tons"

("Mexico Corn," 2017), making Mexico "the seventh largest producer of corn in the world"

("Mexico Corn," 2017), yet, Mexico, for a very long time, was the largest buyer of American

corn (Semple, 2017). "Corn is perhaps Mexico’s most important agricultural commodity"

(Semple, 2017), and because of American subsidies, "rural Mexican farmers could not compete

with low-cost American subsidized corn" (Amadeo, 2018a). Thus, many Mexican farmers were

forced to exit the market, but also, "the Mexican farmers who managed to stay in business were

forced to use more fertilizers and farm marginal land to survive" (Amadeo, 2018a). Because

American corn is cheap due to the subsidies put into place by the American government, when

NAFTA was created, it was intended to increase competition, but it had the unintended
AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 6

consequence of forcing Mexican farmers to compete with American corn producers who were

given an unfair advantage through subsidies given by the American government.

Arguments in favor of eliminating agricultural subsidies come in many varieties and

include many different types of arguments—political, economic, dietary, environmental, etc. A

major argument given in favor of eliminating agricultural subsidies focuses on the differences in

whom agricultural subsidies are perceived to be benefitting as opposed to whom they actually

benefit: Deborah Lee and Marlanda English show this discrepancy: "Since 1935 the number of

farms in the United States has dropped from seven million to two million--and of these, only

400,000 are full-time farms" and that "Agriculture has morphed from family farms to huge

agribusiness" (2016, p.2). This is probably counter to public perception, since "agricultural

subsidies" sound like payments given to small American farmers that need the money to keep

producing their crops, but that perception is incorrect, as a vast majority of the support goes to

very large farming operations worth large sums of money. Another interesting argument is one

that focuses on the environmental impact of agricultural subsidies: "Global subsidies may also

lead producers to overuse fertilizers or pesticides, which can result in soil degradation,

groundwater depletion and other negative environmental impacts" (Clay, 2013). The

environmental argument against subsidies is very powerful and is one that could possibly be

popularized to eliminate agricultural subsidies.

S. Goldmark and Richard Grant put forth arguments in favor of maintaining America's

current agricultural subsidies: "agriculture is a strategic industry, . . . before even considering

ending farm subsidies, the government must take into account a variety of considerations,

including the strategic importance of remaining wholly independent in our food supply and the

barriers domestic farmers face in competing in world commodity markets" (2016, p.3).
AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 7

Goldmark and Grant state that if America was to eliminate its farm subsidies, its farmers would

not be able to compete with the farmers of countries that produce subsidized crops, similar to

Mexico's situation with America's subsidized farmers. Another opinion is to fix agricultural

subsidies, not end them: Mark Bittman states that "like so many government programs — what

subsidies need is not the ax, but reform that moves them forward" and to use the money saved

from cutting out parts of agricultural subsidies in order to "Fund research and innovation in

sustainable agriculture," to "provide necessary incentives to attract the 100,000 new farmers

Secretary of Agriculture Vilsack claims we need," to "Save more farmland from development,"

(2011) and so on.

Based on the research compiled in this paper, there are solid arguments for both

eliminating, as well as keeping, American agricultural subsidies. The argument made by

Goldmark and Grant in favor of keeping agricultural subsidies—that, if the United States

eliminates agricultural subsidies, then it will be put into a position that is similar to Mexico's

situation—is strong. However, due to the abundance of evidence showing the adverse effects of

agricultural subsidies, as well as the staggering bill that agricultural subsidies create, it seems

that the best course of action is to eliminate agricultural subsidies. The elimination of agricultural

subsidies will bring with it a plethora of challenges in its own right, but, based on the economic

and environmental issues that agricultural subsidies create, eliminating them will ultimately

prove to be more beneficial than harmful.

AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 8

References

Amadeo, K. (2018a, April 24). Fast Facts About the World's Largest Trade Agreement.

Retrieved from https://www.thebalance.com/facts-about-nafta-statistics-and-

accomplishments-3306280

Amadeo, K. (2018b, February 16). What Is the History and Purpose of NAFTA? Retrieved from

https://www.thebalance.com/history-of-nafta-3306272

Bittman, M. (2011, March 01). Don't End Agricultural Subsidies, Fix Them. Retrieved from

https://opinionator.blogs.nytimes.com/2011/03/01/dont-end-agricultural-subsidies-fix-

them/

Clay, J. (2013, August 08). Are agricultural subsidies causing more harm than good? Retrieved

from https://www.theguardian.com/sustainable-business/agricultural-subsidies-reform-

government-support

Edwards, C. (2018, April 16). Agricultural Subsidies. Retrieved from

https://www.downsizinggovernment.org/agriculture/subsidies

EWG. (2017). EWG's Farm Subsidy Database. Retrieved from

https://farm.ewg.org/progdetail.php?fips=00000&progcode=corn

Ford, A., & Flynn, S. I. (2016). Farm Subsidies: An Overview. Points Of View: Farm Subsidies,

1.

Goldmark, S., & Grant, R. A. (2016). Counterpoint: Farm Subsidies Are Needed For American

Farmers. Points Of View: Farm Subsidies, 3.

AN ECONOMIC VIEW ON AGRICULTURAL SUBSIDIES 9

Lee, D., & English, M. (2016). Point: Farm Subsidies Are No Longer Necessary. Points Of

View: Farm Subsidies, 2.

Mexico Corn: Adequate Reservoir Levels Benefitting Winter Corn. (2017, March 15). Retrieved

from https://ipad.fas.usda.gov/highlights/2017/03/Mexico/index.htm

Miller, R. L. (2017). Economics Today. New York, NY: Pearson.

North American Free Trade Agreement (NAFTA). (2017). Retrieved from https://ustr.gov/trade-

agreements/free-trade-agreements/north-american-free-trade-agreement-nafta

Semple, K. (2017, April 02). Mexico Ready to Play the Corn Card in Trade Talks. Retrieved

from https://www.nytimes.com/2017/04/02/world/americas/mexico-corn-nafta-trade.html

Subsidy. (2018, March 28). Retrieved from https://www.investopedia.com/terms/s/subsidy.asp

Welker, J. (2011, November 7). Jason Welker. Retrieved from

http://econclassroom.com/?p=2811

White, D. (2018, March 1). Are U.S. Farm Subsidies Corporate Welfare or National Necessities?

Retrieved from https://www.thoughtco.com/us-farm-subsidies-3325162

World of Corn. (2018). Retrieved from http://www.worldofcorn.com/#/