Writing in the Wealth of Nations in 1776, Adam Smith stated that, “corn is a necessary, silver is only a superfluity (sic).” Faced with a growing population and flattening agricultural productivity, essentially what Smith was pointing out was the world needed more corn and less silver.
Things have changed in the last 240 years.
Now the world seems is awash in corn—we’re almost about to buried in the stuff. Meanwhile, it is the demand for silver—due to the metal’s use in everything from cellphones to polyester fabrics—that is fast outpacing supply.
Domestic corn production has increased 52 percent in just the past four years. And this increase is in spite of a 55 percent drop in the price of corn over the same period. At first glance this seems to fly in the face of the most basic principle of economics. When price goes down, supply should likewise decrease. What’s going here? The answer comes down to one word: subsidies.
In 2016 the U.S. Department of Agriculture doled out almost $4 billion in cash to corn farmers. The subsidy on corn production is by far the largest for any agricultural product, accounting for over two-thirds of all USDA payments across all crops. So while the market price of corn has been dropping precipitously, farmers have been producing more and more since they know their profits will be protected by a government check. And actually, the more they grow, the lower the market price drops and the more in subsidies they get from Uncle Sam.
It’s a similar story in China. Beijing, for all its vaunted economic expertise, follows the same misguided economics that we have in the United States. In 2007, the People’s Republic began subsidizing domestic corn production just like the clever Americans. The result? Plummeting prices and soaring production.
The Chinese approached the issue a little differently than the U.S., however.
The U.S. government lets the market set the price of corn and just pays farmers a subsidy to bring their revenue per bushel up to some pre-determined level. China, on the other hand, takes that same amount of government largesse and uses it to buy corn—thus driving up the market price so farmers make a fair return. Both programs cost about the same, and both result in essentially the same income for farmers, but they end up with strikingly different outcomes.
American farmers, faced with a surplus of corn, looked elsewhere in the world to unload their crops at the low market price. Meanwhile, on the other side of the world, the Chinese confronted with artificially high government supported market prices, looked elsewhere to buy corn. Voila: U.S. farmers sold and shipped all those excess ears to China. And if you don’t think its bad economics to have two national governments write checks so that a common crop between them can be swapped across an ocean, just wait for what comes next.
Remember all those corn purchases the Chinese government has been making to artificially prop up the market price? They didn’t just throw that corn away. Rather, they stored it and now they have well over 100 million metric tons of corn sitting in silos all over the country. That’s about half of all the harvested corn in the world. But now they’re out of room and are playing a game.
First, the Chinese started by auctioning off the stored corn, which dramatically increased supply and caused market prices to tumble once again. But to compensate for this unstoppable law of economics, they slapped a 34 percent duty and 10 percent tax on imported U.S. corn. This essentially shut down a market for U.S. farmers that in most years absorbed as much as 50 percent of their production. The result? A glut of corn in the U.S., plummeting prices, and of course, ever-larger government checks.
There may be a way out of this conundrum, though. As China has increased its standard of living over the past decade, more and more of its population gets its calories from protein, not carbohydrates. Basically, when it comes to the calorie game, pork is a good substitute for rice. So much so that China, by far the world’s most populous country, now consumes over 50 million tons of pork per year. That’s about 6,000 tons per hour. And what do all those pigs eat? Corn of course.
Kevin Cochrane teaches business and economics at Colorado Mesa University, and is also a Permanent Visiting Professor of Economics at The University of International Relations in Beijing.
