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...