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Comment by bradford | Hacker News Reader

A lot of American cultural institutions are being lost in our effort to modernize and optimize production. This affects a lot of industries, not just dairy. Sadly, like the author, I can't really think of a good solution.

The only proposal that comes to mind: If America values its cultural institutions (I'm thinking specifically farmers, craftsmen, certain maritime industries, and machinists, although there are certainly more) and wants to preserve them, government entities need to provide some of the funding. This is obviously distasteful to some and I'm not sure if the positives outweigh the negatives. I'm also not sure what the extent of preservation societies are in America today.

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I don't mean to jump into every thread, but I want to stress - This is NOT about modernisation or optimisation. It's about large corporations getting paid money by the government to support an unprofitable business, and then growing that business from those subsidies to lose even more money and thus receive even greater subsidies. Those not "playing the game" lose their business - it's that simple. You can either call that good business, or abusing the system, depending on which side of the fence you live.

I feel that we didn't read the same article.

This article is absolutely about modernisation and optimization. The dairy business has been guided, partially by government policy, to maximize milk production while minimizing human labor. This drove the price of milk down, and led to a 'go big or go home' drive for dairy farmers. Smaller operations can't compete with this and they're closing.

> It's about large corporations getting paid money by the government to support an unprofitable business

While I don't doubt that this happens, It was not a theme of the article.

> Those not "playing the game" lose their business - it's that simple.

No, business was lost because the small farms are being outcompeted by large farms. This was a consequence of the market, not government subsidies. I think it would be fair to say that government policy shaped the market, but that's not the same thing as a subsidy.

> small farms are being outcompeted by large farms. This was a consequence of the market, not government subsidies

How so? Government subsidies are what enabled the huge agribusinesses to take over the market. The article discusses exactly this point.

> Government subsidies are what enabled the huge agribusinesses to take over the market.

That might be so, but that's not what the article discusses. The word 'subsidies' is only mentioned once, and it's not in a context that supports your assertion. I'm not an expert on farming and I'm not sure if you are either, so I hope I can be forgiven for trusting what's in the article instead of commentors on this thread.

If I were to paraphrase what went wrong with american agriculture, based on what's in the article, I'd say that the root cause was a policy change enacted during the Nixon administration:

> the farming landscape changed dramatically in the 1970s when President Nixon promoted agribusiness lobbyist Earl “Rusty” Butz to USDA secretary. Butz had a reputation going back to at least the 1950s for lobbying for dramatic modernizations to farming at the expense of small farms. “Adapt or die; resist and perish…

The change removed regulations from the FDR era, regulations that were explicitly in place for environmental purposes:

> Before Butz, farming practices were ruled by FDR New Deal-era controls on production, when memories of the Dust Bowl and destruction of the land through overproduction were still vivid.

> Butz became a pariah to everyone but the big farmers as small farmers went bust under the continual tightening of the efficiency noose

> only farms with thousands of cows, that can use their size to cut costs, are able to operate in the black:

So, either you go big, and sell your dairy for the lowest possible cost, or no one buys your dairy and you go out of business. when I said "small farms are being outcompeted by large farms", that's what I meant.

Ive tried to explain this to you, but you clearly aren't interested in the reality.

What mechanism allowed these unprofitable farms to grow in order to purchase the smaller farms - where did the money to do this come from? Please consider that they are (without exception) unprofitable and have become proportionally less profitable as time has gone by.

You clearly have no understanding of the economics of dairy farming if you think the farmers - large or small - are setting their price, or if their profitability is in some way dictated by how they operate on an agricultural level. Its subsidies, plain and simple.

I don't understand your agenda in trying to make this out to be something else. I get that this is an entrepreneurship forum, but this is the exact kind of example we should recognise as destructive - not framing it as good business in any way.

EDIT: I should clarify, I'm not suggesting that the owners of large dairy farms are evil. It is the system that is forcing this upon them too. If they didn't do it, they too would go bankrupt. If thats the ideal of "go big or go home", well, there can be only one...

No matt, you have not explained it at all from an economics perspective - in fact, your own stated facts don't support the notion that bigger farms have some kind of leverage from the subsidies over smaller farms.

A 'unit subsidy' doesn't at all help larger entities more than smaller ones - there must be some other dynamic at play.

A unit subsidy should be the economic equivalent of broadly elevated demand.

Either 1) larger farms simply do have some economies of scale, thus flushing out smaller ones - in which case subsidies are not super relevant and this would be happening anyhow or 2) there's some kind of direct advantage the larger producers have in yielding a per-unit subsidy, I can't imagine what that would be, but you seem to have a lot of expertise so perhaps you can elucidate.

I replied to you regarding this in another thread.

In short, its #2. It's to do with volume. By producing a large volume of an unprofitable product you would usually lose more money than someone producing a small volume of an unprofitable product. However, because of the subsidies, this has been reversed, and you now make more money than someone creating a smaller volume. This is exactly how these large farms have been established (they were incorporated to take advantage of these very subsidies), and they have used the large "profits" to further grow. The margins have further reduced, but they are still "profitable" because of the volume.

> The change removed regulations from the FDR era

And substituted new regulations which favored large agribusinesses. The article doesn't go into detail about that part, but it's crucial to understanding why, for example, corn overproduction has led to high fructose corn syrup, ethanol from corn, etc. in the US. The key regulatory change was that, rather than paying farms not to grow corn to keep production limited, the government started subsiziding minimum prices for corn even when the market price would be lower due to a glut in supply. This obviously favored big agribusinesses, who could overproduce corn in far larger quantities than small farms.

More discussion here:

http://www.pbs.org/independentlens/kingcorn/bushels.html

Its most definitely NOT about modernization and optimization. Its literally exactly as I describe it.

Here is how it works:

If you have a small number of cows, you receive a small subsidy. If you have more cows you have greater subsidy. Therefore you increase number of cows to give yourself larger subsidy to support yourself through declining profit margins.

You can only increase animal density so far. After that you need more land, i.e. you need to expand. If you expand (i.e. buy up all the smaller farms - please go back and reread the article), then you have more cows, and therefore get greater subsidies.

You invest that "profit" into buying more farms (that are desperate to sell as their profits are too small for them to survive, but capped as they cant increase their density/estate), get greater subsidies, etc.

That is not "out-competing" smaller farms. UNPROFITABLE large farms are literally being paid by the government to put the smaller farms out of business.

This is exactly what the article is about, although the author does a poor job of explaining this - in fact, he doesn't even mention the subsidies, but I assure you that this is the case.

Like I said - it's disgusting.

That's a good point - but I don't see how there's any 'economy of scale' to the racket.

An individual cow has a certain cost, produces a certain amount of milk, and as you say, yields a certain subsidy.

The unit costs of that scale up and down fairly linearly - i.e. it doesn't explain why it's better or worse for smaller or bigger farmers.

Now - if there was some sort of 'economy of scale' in this kind of farming, i.e. if you can reduce the overhead of each cow by scaling up, well, then it's possible that the profitability threshold is somewhere near a large amount of cows, in which case, smaller producers go out of business.

That said, in the later case ... well it is all about efficiencies and optimization - not subsidies.

In short - unless the 'big farms' get some kind of special subsidy due to their size, then this actually is about optimization, not about subsidies.

If the subsidies are 'per cow' then it doesn't seem that smaller farms are worse for wear than bigger farms.

Instead of subsidies, imagine if there were simply higher demand for milk, and the gov. stopped the subsidies. Imagine that the revenue per cow increased to the exact amount of subsidy. Well, in this case, the economics would be net neutral, totally the same situation, financially. Well, the smaller farmers are going out of business in this situation, and not the bigger ones. Ergo - this is about scale and optimization - not about subsidies.

Although the profits are the same, it is to do with volume.

For example, both you and I sell "widget X". The profit on each item for us both is $10. If I sell 10, I make $100. If you sell 1,000,000, you make $10,000,000. We are both have the same profit margin (i use this word lightly, as its only because of the subsidy that there is any profit), but I cant live off my small share. You, however, can afford to invest to expand your business - in a market which is NOT PROFITABLE (this is the point I keep trying to drive home, but you and GP just don't seem to get this point).

These large companies are growing their businesses in an unprofitable market, driving down the margins where it has become unsustainable for small players to exist. It's not a fair playing field as, due to the way the dairy industry works, all milk is equal. They aren't making better milk, or cheaper milk, they are making MORE milk - these large farms were specifically established for and driven by the ability to earn guaranteed "profits" in a UNPROFITABLE MARKET. You can call that optimisation if you like, but its still about the subsidies!

So thats the economy of scale, and it's been driven by subsidies. The larger you are, the more money you make.

Id like to also point out that these larger farms are able to secure funding to further drive their growth, based on them being so "profitable".

If the government stopped the subsidies, you are correct - that is exactly what would happen - and it would happen faster. The problem is that this entire situation has been caused directly BY the subsidies. Ergo, it's about the subsidies.

Of course, now these large farms exist they are able to reduce costs (primarily on feed) so there is certainly economy of scale in that regard - but they shouldn't exist in the first place - they were created out of subsidies, are supported by subsidies (they are still unprofitable!!!), and have made the market untenable for smaller farms.

Normal Behaviour: Widget X loses $10 per sale. Large company sells 1,000,000 widgets = -$10,000,000 Small company sells 1,000 widgets = -$10,000 Small company is more 'profitable' than large company.

Subsidised Behaviour: Government subsidies widget X sales by $12 a unit. Brings profit margin to $2 per sale Large company sells 1,000,000 widgets = $2,000,000 Small company sells 1,000 widgets = $2,000

Nothing has changed other than the government creating an artificial profit margin. The large company can use these assets to expand, and create more widgets for sale. The price of widgets goes down.

Im not an economist, so I cant explain this using some fancy formula, but all the literature is available for you to read if you are so inclined.

Supermatt, thanks for the response, but I think you have the microeconomics upside down.

The subsidies are not putting small farmers out of business, the 'situation' is not being driven by subsidies, it's just a regular problem of economies of scale.

In fact, as I will demonstrate, the smaller farmers may actually benefit more from the subsidies than the bigger farmers.

First, consider that the subsidy is de-facto substitute for 'higher demand' (or you can think of it that way). The subsidy has (almost) the exact same economic effect as shifting the demand curve (better described as shifting the supply curve, but that's not as intuitive). So, imagine a situation where consumers decided they wanted more milk - and the government decided to end the subsidy. Well, we'd be in the exact same economic situation. Another way to think of it is that the government is subsidizing each consumers purchase of milk during an era of weak demand.

In this scenario, as long as the subsidy is uniform, it doesn't necessarily help bigger farmers more than smaller farmers, it helps them about the same.

Now - as you indicate there are 'economies of scale' at play here, right? Bigger farms are going to be able to save a little bit here and there from scale, that's normal.

What this means, is that the 'unit profitability' for the big farms, is going to be better than that of the small farm. This means the smaller farm is more sensitive to a dip in prices, which in turn means the subsidies are likely going to have a more positive impact on smaller farms, than bigger farms.

The 'big farms' with more operating capital, and better margins, can withstand a longer dip in prices. The small farms cannot.

In this scenario - what the 'big farms' actually want (ie ideal for their business) is a prolonged period of weak demand that puts the smaller players under considerable pressure - so the 'big farms' can go in and buy the smaller ones on the cheap. Of course, the big farms would then like prices to rise.

So let's look at the example:

Big farm cost of production per litre = $1/L

Little farm cost of production per litre = $1.20/L (i.e. not as good).

Wholesale price of Milk $0.90/L - i.e. below the cost of production (i.e. everyone should be out of business)!

Government subsidy per litre = $.40/L

This means that net wholesale price + government subsidy is $1.30/L.

The 'big farms' have a profit margin of 30 cents/L

The 'little farms' have a profit margin of 10 cents/L

So - you can see that the 'little farmer' has a lot less 'safety net' that the big farm. It might even be close to the threshold of profitability.

The 'ideal' situation for the big farms would be for the price of Milk to dip below 80 cents - because with the subsidy that means their (smaller) competitors go out of business! At 80 cents a L, the 'family farms' are up against a wall, and have to sell to the big farms who can maintain their profitability.

So let's see what happens if the subsidies are wiped out. Basically the 'weakest' will die off. The small farms will be 100% out of business. Then the bigger farms will start to die off until production is small enough to yield a higher price, high enough to remain profitable. And yes, there is likely enough demand for local milk in America to sustain some farms. But it will be the 'biggest' that survive, because they have the economies of scale.

In summary: in a situation wherein an industry has some economies of scale, subsidies will tend to provide most relief for those who have the tightest margins, which will be the smaller players.

To get technical, have a look at these curves [1]

You might have to stare at it for a bit to make sense of it, but it's not super complicated. Anyhow you can see the supply curve S, and the supply with subsidy curve S1.

The thing is, it's the small farmers who are going to be on the right side of that supply curve (i.e. only able to produce at a higher price). It's the bigger farmers on the left side of that curve (i.e. able to produce cheaply). As that supply curve shifts leftward, the first people to go out of business are the the smaller suppliers. The most robust and efficient producers will go out of business last. Again, because it's not 'smart little farms' that are the one's with the advantage, but rather the big ones ... the subsidies help the big businesses, not the small ones.

There are situations where subsidies might have the opposite effect - this is where there might not be economies of scale. Some industries don't scale very well - ad/creative agencies, some kinds of consulting firms. Creative firms. Film makers etc.. In these scenarios, bloated, inefficient entities can be held together with some subsidy support, to the detriment of the smaller, more efficient players.

If there were no subsidies, the farmers in this article would have been out of business long ago.

I suggest a supply management system like we have in Canada might work well, but it's a hard thing to establish in America.

[1] https://www.economicsonline.co.uk/Competitive_markets/Subsid...

Disagree. Govt subsidies cause prices to sink so low that it costs more to grow than to sell.

It’s an old one, but King Corn is still one of my favourite Farm/food documentary. I recommend it highly.

> Sadly, like the author, I can't really think of a good solution.

But that IS the solution. Preserving archaic inefficient institutions and forcing society to pay for it solely due to nostalgia is a terrible idea.

But there are solutions: entertainment & agroturismo. Sure, it won't preserve every single farm, or even 1 in 1000, but it will preserve some of then, just as tourism helps maintain a lot of historical sites around the world.

Have you read the article ? The "new" way of doing things have horrible externalities that can destroy those communities.

That's a broad generalization, and it seems that it is mostly driven by anger.

The reason you can go to a supermarket and buy food IS the "new" way of doing things. The reason there's close to zero food waste in production and distribution of food in developed markets is the "new" way.

Their farm is dying because it is inefficient. Let it die.

http://www.fao.org/food-loss-and-food-waste/en/

The UN says a third wasted.

There are other approaches too, some farms are focusing on local communities -- I recognize this isn't possible everywhere, but I bought a whole beef from a farm just outside Seattle. Small farm, well cared for animals, grass fed their whole lives.

It was more expensive than supermarket beef. It was less expensive than supermarket organic beef. But it cut out a LOT of middlemen and perverse incentives to race to the cheapest price/lb.

Yep, let consumers decide which farms should be kept or not, I'm all in favor of that!

> government entities need to provide some of the funding

No, government entities need to stop providing funding to the huge agribusinesses that are out-competing the small farms only because they have gotten the playing field tilted in their favor.

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