The Vices and Virtues of Corn Subsidies: a look into corn subsidy reform

Argumentative Essay

Adam Gild

The Vices and Virtues of Corn Subsidies: a look into corn subsidy reform

Corn subsidies have been a fixture of American agriculture since the 1970’s and 1980’s when they first took form and have remain unchanged since the early 1990’s. This is largely because they have been so effective in their goal to raise the amount of corn grown domestically while stabilizing corn as a commodity. In the past decade corn subsidies have been hijacked by the ethanol industry, which is not necessarily bad but puts an unfair burden on taxpayers. For this reason, it may be time to reevaluate the status of corn subsidies in America as well as propose swift reform that protects the financial interests of everyone involved and cut government spending while ensuring food security and enough corn to be readily used in ethanol production. Many see the solution to this issue as a variable subsidy to meet these goals.

It was originally the primary of function of corn subsidies to increase the amount of corn grown domestically. In this sense it is still extremely successful. America grows more than 14% of the worlds corn supply and readily exports corn to 73 countries (U.S. Grain Council 1). America grows an excess of corn, which is not necessarily harmful. The issue is there is a bulk surplus of corn that has been artificially held at a consistent cost by ethanol producers for far too long. The surplus of corn grown in America drives down the cost of corn both domestically and abroad. This excess of cheap corn has been used by the ethanol industry to produce ethanol at an exceedingly cheap rate. Additionally, it allows the ethanol industry to command a larger part of the market.  The relationship between ethanol production and corn subsidies has greatly expanded after the introduction of the renewable fuel standard, which mandated gas sold domestically contain a certain percent of ethanol. Because of this the importance of corn production came to the forefront and so did the importance of corn subsidies.

While the behavior of ethanol producers in not necessarily unethical, it does raise questions as to why ethanol producers are making such high profit margins while corn subsidies remain unchanged. With corn subsidies, corn costs around $4.20 a bushel. One bushel of corn can produce 2 gallons of ethanol at a cost of $ 2.50 a gallon for a total cost of $5.00 per bushel. This leaves ethanol producers with a hardy $.80 profit margin (Gardner 12). While it is the main function of a business to create revenue for its shareholders, this should not be done at the expense of the taxpayers through corn subsidies. Furthermore, ethanol producers have held corn at a consistent $4.20 per bushel cost since the implementation of the Renewable Fuel Standard which ensures a market for ethanol throughout the United States.

For the sake of this argument, narrowing down the eight types of subsidies the government currently provides surrounding corn to just one will give us a better understanding of how ethanol producers have been able to rig the game in their favor. The largest type of corn subsidies come in the form of price loss coverage (USDA 2). Price loss coverage is the basic way most people think about subsidies. Price loss coverage serves to significantly defray any losses corn growers may incur due to fluctuations of corn prices (Edwards 2). Price loss coverage is not the issue because it protects farmers from extreme market volatility. For example after a drought in the Midwest price loss coverage helped many farmers after the price of corn dropped heavily (European Commission 1). Since ethanol producers control such a significant amount of the demand for corn, they control a vast amount of influence over the cost of corn and therefore can keep corn prices artificially low by manipulating demand and using price loss coverage to their advantage. This manipulation is seen in other industries but does not come at the expense of the government in such a brazen fashion. Ethanol producers have figured out how to use corn subsidies in their current form to their advantage at the expense of taxpayers. For this reason there should be a swift policy change to protect taxpayers, farmers, and ethanol producers so that the federal government can better facilitate trade between them.

Price loss coverage plays a vital role in supporting farmers and ensuring food security. However, the flat rate payout system currently used holds corn prices too consistent, which allowed ethanol producers to manipulate the corn subsidy system. In this case, volatility in the price of corn as a commodity could be beneficial.  A proposed market increase in the value of corn and decrease in the market cost of ethanol could see net gains of upwards of 818 million dollars over the course of one fiscal year for ethanol buyers (Gardener 14). And a decrease in corn production would raise corn costs giving corn farmers a collective 450 million dollars over a single fiscal year (Gardener 12). One of the major benefits of corn subsidies is that they keep production artificially high and cost artificially low, which is not inherently bad as long as the benefits are not hoarded by ethanol producers. For this reason introducing volatility into the cost of corn as a commodity would be beneficial (Edwards 5). The cost effectiveness of corn subsidies as they currently stand is entirely backwards. Taxpayers are currently paying more to see fewer net gains, but this system is currently supported because it favors ethanol producers.  Regardless of why these policies that monetarily benefit ethanol producers are still see popular support among politicians, there must be some fundamental changes in how corn subsidies work in the United States.  Some options have been proposed that hold merit but ultimately fall short. Slightly altering flat rate payouts would only delay ethanol producers from once again stacking the deck in their favor. Getting rid of price loss payout would decrease corn production so much that the price of corn would skyrocket making ethanol production impossible from a financial standpoint. That is why an expert in corn subsidies Wallace Tyner proposes a variable subsidy system.

When writing this essay I searched for an expert to interview on the subject. Although I started out with very strict criteria, such as someone in the ethanol production industry or an expert on corn subsidies from an economic standpoint. When I was unable to secure an interview with anyone within my strict criteria, I searched for anyone with experience with corn subsidies or corn-based ethanol production to no avail. For whatever reason, every candidate for the interview either lacked a level of expertise on the subject or was unable or unwilling to speak with me about the economic effects of corn subsidies. For this reason, Wallace Tyner’s paper on a variable corn subsidy system became a vital component to my research.

The goals of corn subsidies are to grow enough corn to ensure food security and enough corn to be used in ethanol production. Because of the current state of corn production, ethanol production, and corn subsidies the issues of market volatility and overall cost to the taxpayers must be resolved.  A variable subsidy system ensures food stability, a ready source of corn for ethanol production, necessary volatility in corn as a commodity, and reduce the overall cost to the taxpayer. Unlike short run subsidy plans to faze out corn subsidies all together, a variable subsidy scale would calculate payout to farmers based on the price of corn as well as the price of ethanol holding farmer profits at a consistent rate while capping subsidized profits of ethanol producers. Subsidies would hold ethanol profits above 20 cents per gallon and cap subsidized profits at 38 cents per gallon (Tyner 201). This range has been calculated by Tyner to extend the benefits of corn subsidies beyond just ethanol producers. That is not to say ethanol producers could not make more than 38 cents per gallon, but they would have to make it without the assistance of the government. This system would save the government between 2% and 38% annually on corn subsidy payouts. Because of this, the variable subsidy system accomplishes the goals of protecting the financial interests of all parties involved and lowering government spending while ensuring food security and enough corn to be readily used in ethanol production.

Corn subsidies have been a fixture of American agriculture since the 1970’s and 1980’s when they first took form and have remain unchanged since the early 1990’s. This is largely because they have been so effective in their goal to raise the amount of corn grown domestically while stabilizing corn as a commodity. In the past decade corn subsidies have been hijacked by the ethanol industry, which is not necessarily bad but puts an unfair burden on taxpayers. For this reason, a variable subsidy system would be an excellent reform that protects the financial interests of everyone involved and cut government spending while ensuring food security and enough corn to be readily used in ethanol production.

Works cited

Alston, Julian M, et al. “Farm Policy and Obesity in the United States.” Agricultural & Applied Economics Association, vol. 25, no. 3, 2010.          https://www.jstor.org/stable/pdf/choices.25.3.10.pdf

Edwards, Chris, “Agricultural Subsidies” Downsizing the Federal Government: Your Guide to Cutting Federal Spending. April 16, 2018. https://www.downsizinggovernment.org/agriculture/subsidies#_edn18

European Commision, “Causes of the 2007-2008 global food crisis identified” DG Environment News Alert , January 20, 2011. https://ec.europa.eu/environment/integration/research/newsalert/pdf/225na1_en.pdf

Gardner, Bruce. “Explorations in Biofuels Economics, Policy, and History.” Citeseerx.ist.psu.edu, Journal of Agricultural & Food Industrial Organization, 2007, citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.362.6245&rep=rep1&type=pdf.

Tyner, Wallace E. “Comparison of a Fixed and Variable Corn Ethanol Subsidy.” Agricultural & Applied Economics Association, vol. 21, no. 3, 2006. https://www.jstor.org/stable/pdf/choices.21.3.0199.pdf

U.S. Department of Agriculture, “Farm Income and Wealth Statistics: Government Payments by  Program,” February 7, 2018, www.ers.usda.gov/data-products/farm-household-income-and-characteristics.aspx.

U.S. Grain Council, “Production and Exports”. 2019/2020 Corn Export Cargo Quality Report, January 2021. https://grains.org/buying-selling/ethanol-2/ethanol/