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The fundamental economic problem is that demand is very inelastic. When you draw a supply-demand curve for food it looks very close to a vertical line, people do not buy significantly more food when you make it cheaper, people do not buy significantly less food until they run out of money.

The implication is that even slight excesses result in rock bottom prices, and even slight shortages result in very high prices. This volatility is bad for everyone. Therefore the government steps in with subsidies to even out how much farmers get, and to guarantee a surplus to avoid ruinous food prices for consumers.

But there is simply no good way to do this without perverse consequences somewhere...




> people do not buy significantly more food when you make it cheaper, people do not buy significantly less food until they run out of money.

That's not really accurate. Yes, the total amount of food may not change, but the type of food changes quite a bit. People will eat less desirable, but cheaper food.


That's not so much an issue with grain prices. Rice and bread and such are the most basic of staple foods, and pricing people out of that market results in hunger and starvation.


But huge amounts of the staples the US produces are then fed to animals to make meat. It takes something like ten pounds of grain to make a pound of hamburger. If food gets more expensive people cut back on meat, which frees up more grain.


That is true in the US, but not as true in other countries. The US eats an enormous amount of meat compared to most countries (and even more so compared to history).

The article mentions that it would be better if some of the farmers started growing vegetables rather than grain, but the subsidies don't pay for vegetables.


There are multiple kinds of rice, some area cheaper and easier to grow than others.

Same for wheat - low gluten types are cheaper. (Which is basically why they invented the http://en.wikipedia.org/wiki/Chorleywood_bread_process )


People buy meat when they have more money than required for sustenance, which takes much more grain than direct consumption.


In the long run, yes, this is true.

However there is a long lead time for changing how many animals there are in the food pipeline. Thus the amount of meat animals does not increase very rapidly to respond to a bumper crop in wheat. (The meat supply can, however, drop rapidly after a drought or flood...)

And the yearly fluctuations in crop yields tend to be fairly large. Certainly larger than the variation we're likely to see in how much people want to eat.


>Therefore the government steps in with subsidies to even out how much farmers get, and to guarantee a surplus to avoid ruinous food prices for consumers.

Yeah it's not like there are mechanisms to deal with this sort of volatility (hint - futures).


Futures do not change how big the price swing is from year to year - they just let you control now the cost you'll have in a few months.

It is also a technique mostly for businesses, not consumers. How many consumers do you hear about controlling next month's food bill by buying their produce on a future's market? Right, none.


Are you implying that you buy your food from the farmers or are you're telling me that the food industry/retailers can't estimate the consumer demand and make contracts/futures on that ? And how exactly do futures not change the price swings from year to year ?


The latter. Futures do not change the supply or demand, and therefore do not change the overall results of a supply-demand curve. What they do is allow people to estimate where it will eventually land, and choose whether to lock in prices some distance in advance.

This ignores a subtlety. If one consumer locks in a large fraction of the supply at a low price, then the supply is smaller than expected, you've made the supply-demand problem more extreme for everyone else. So futures allow entities to lessen their own volatility, but that increases everyone else's volatility.


It becomes highly elastic over longer time periods, if you can cheaply store it for one year you can feed to to cows / chickens / pigs and then eat them.




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