Exploring the Merits and Societal Cost of Corn Subsidies

Every responsible citizen should look out for the welfare of his fellow man and avoid unnecessary government spending. For this reason, I became interested if corn subsidies and their effects on society. My principal concern is not with ethanol production or the effects of surplus corn on the North American diet, but whether or not corn subsides are still cost effective and benefit the average person. The economic drive to subsidize corn makes sense on paper but may have taken a turn in the last few decades that makes them an outdated government expenditure. The relationship between corn subsides and ethanol production has been a part of my life for a long time. My father works in environmental sustainability at Vanderbilt university, which made biofuels a common topic of discussion in my home growing up. When writing a recent paper I discovered that corn subsidies have little impact on the market cost of corn. This raised the question, who benefits from corn subsidies? Do corn subsidies directly or indirectly benefit the average person or do they only benefit a small select group? And more importantly, are they still worth it in a monetary sense? Modern corn subsides started in the 1970’s as a response to rising oil prices from the Middle East. States that grow large amounts of corn have added their own corn subsides on top of other federal subsides. Ethanol production saw a massive expanse when the federal government mandated all gas contain a certain percentage of ethanol. Now in the current day with ethanol and other biofuels industrial production well established the effectiveness of corn subsides is called into question.

The first place I looked for answers was the history of corn subsidies and their relationship to biofuels. I read Explorations in Biofuels Economics, Policy, and History by Bruce Gardener. Bruce Gardener has written almost exclusively about the government’s role in the economics of agrobusiness.  Many of the topics he discusses are some form of agricultural subsidy or the effects of a government subsidy. He discusses the early effects of corn subsides on market trends. The first figure he brings up is his first page is one bushel of corn creates two and a half gallons of ethanol, so the government was able to calculate what corn subsides should be to maintain a steady food cost while jump starting the ethanol industry in 1970’s (Gardner 1).  As the need for ethanol rose so did subsidies to stabilize market demand. As with all industrial processes, ethanol production became increasingly cheap and more effective, and ethanol saw a sharp jump in production in the 1990’s. Ethanol costs about $2.00 a gallon which means most ethanol plants can get $5.00 of ethanol from each bushel. Considering the price of corn is nearly always less than $4.20, this leaves a healthy profit margin for ethanol producers. This reaffirmed my suspicion that corn subsidies disproportionately benefit ethanol producers. The author explains the process behind calculating corn subsides. The process is based on the total demand for corn as well as the ratio of corn used in food, cattle feed, and ethanol production. The author then brings up the statistic that of corn prices raised by $.04 per bushel it would increase producer profits by $425 million over the course of a single fiscal year(Gardner 12). If there was this $.04 jump in the price of a bushel of corn, then, “the market price of ethanol falls 8.2 percent as its production increases, generating a gain to ethanol buyers of $818 million.” (Gardener 14) This made me consider the idea that corn subsides could benefit farmers as well as ethanol producers. Because it has a minimal effect on the price of corn and quantity of corn produced, this would benefit both farmers and consumers while having a minimal effect on the overhead of the ethanol industry. This made me think that corn subsides could still exist in a limited capacity and still benefit farmers, consumers of corn products and ethanol producers. The author then proposes a long run and short run deficiency program to phase out corn subsidies without hollowing out the market. Both propose a $.236 direct payment to farmers per bushel of corn (Gardner 14), both offsetting the cost for farmers, incentivizing growing, and producing the surplus needed to keep the ethanol industry afloat during the transition. The main difference between the two programs in their duration to phase out subsidies. The taxpayer will take a hit in both cases, but not near the level at which the government loses money paying our current corn subsidies. The short-run program greatly benefits growers and consumers of ethanol products while still protecting the financial interests of ethanol producers. Personally, I would support the short run program because it protects the economic interests of all parties involved, has the quickest turn over and has a minimal hit to the taxpayers. The Author concludes that corn subsides have out lasted their utility and are unlikely to generate any further social changes. Because of this they largely serve to offset the cost of ethanol production for ethanol producers, according to the author. This article provided critical insight to my understanding of the current state of corn subsidies. Gardner’s article showed me that corn subsides could benefit everybody much better if they underwent slight modification. Before reading this article, I would have thought that corn subsidies had a larger benefit to corn farmers. After reading this article I realize that there can always be to much of a good thing. Currently they are too large, and if lowered would see a greater net benefit.

The previous article by Bruce Gardener only provided one viewpoint that was openly critical of corn subsidies, so to gain another perspective more in favor of corn subsidies I read The Socially Optimal Import Tariff and Tax Credit for Ethanol with Farm Subsidies, by Harry de Gorter, David R. Just, and Qinwen Tan. I found this article as a response to an article I had previously read by Bruce Babcock, who’s article I wrote about in the last essay. The authors discuss the positive social effects of corn subsidies and how the monetary cost is offset by the social gain of corn subsidies. Just, de Gorter, and Tan as well as Babcock recognize the benefits of corn subsidies to stabilize ethanol production, food prices, cattle feed costs, and increase corn production. This reminded me that corn subsidies can be an indispensable tool to stabilize corn prices and production. However they also propose there should be an equilibrium between corn subsides and farm policy to protect farmers and consumers without giving ethanol producers an unfair advantage, as opposed to Babcock who views subsides as a necessary evil if. With higher corn production the supply and demand curves devalue corn, hurting farmers, but benefiting consumers and ethanol producers. This central idea to the authors paper made me consider that while corn subsides are vital that a middle ground existed that could benefit everyone. Without subsidies, farmers and ethanol producers could both see large profit margins, but at a higher cost to consumers. This because of the Renewable Fuel standard that mandates all gas contain some percentage of ethanol, so even if corn prices skyrocket, ethanol will still have a stable market and the cost of production will be passed to consumers. The authors propose that an optimal tax credit for corn subsidies exist for any given fiscal year. This optimal tax credit shortens the gap that disproportionately benefits ethanol producers and protects farmers and consumers. A set corn subsidy only increases corn production from year to year, making farmers have to grow more to make a profit, which further devalues corn as a commodity. Once the market is saturated with ethanol, there will be a steep decline in corn prices hurting farmers in the short term and corn consumers in the long term. To break this cycle, the authors propose that a yearly change in corn subsidies based on the previous year’s market trends would be more beneficial. The authors ultimately conclude that corn subsidies are in the best interest of consumers, ethanol producers and farmers, but propose a large-scale change to lower costs and stabilize the market in favor of farmers and consumers.  Their plan prevents the trend in the past few decades of ethanol producers seeing the main benefits from corn subsides and shares the benefits with a larger population. Just, de Gorter, and Tan presented a point of view that was still slightly critical of corn subsides. It was fairly difficult to find an opposing point of view. Just, de Gorter, and Tan were still mostly in support of corn subsidies as they currently stand.

After reading these articles and cross examining the findings with prior knowledge, I now believe corn subsidies disproportionally benefit industrial ethanol producers. I also believe that they are no longer currently worth the money they cost and need serious reform before corn subsides can be useful again. Major changes in corn subsides are needed to make them economically viable again. Previously I would have though higher corn subsides would benefit consumers and farmers far more they do in a realistic setting. When searching for an opposing view, the articles were overwhelming against corn subsidies in their current state. I also noticed policy surrounding corn subsidies has remained remarkable unchanged. I would like to explore why despite overwhelming evidence against corn subsidies in their current state, they have remained unchanged for so long.

Works Cited

Babcock, Bruce A, and Jacinto F Fabiosa. “The Impact of Ethanol and Ethanol Subsidies on Corn Prices: Revisiting History.” Apr. 2011. https://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1004&context=card_policybriefs

Carter, Collin, et al. “The Effect of the US Ethanol Mandate on Corn Prices.” Department of Agricultural and Resource Economics, Sept. 2018. https://www.ourenergypolicy.org/wp-content/uploads/2013/07/The-Effect-oftheUS-Ethanol-Mandate-on-Corn-Prices-.pdf

de Gorter, Harry, Just, Harry and Tan, Qinwen, “The Socially Optimal Import Tariff and Tax Credit for Ethanol with Farm Subsidies.” Ageconsearch.umn.edu, Agricultural and Resource Economics Review, Apr. 2009, ageconsearch.umn.edu/record/49865/.

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, and Justin Quear. “Comparison of a Fixed and Variable Corn Ethanol Subsidy.” Agricultural & Applied Economics Association, vol. 21, no. 3, 2006.