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23 April 2009

Salad > Hamburger

For the past few years I've been asking myself this question; why is a salad more expensive than a hamburger? It's illogical. At McDonald's you can buy a salad for about $5.50 or a hamburger for $1.00. You can even buy a fancy big mac or whatever for $2 or $3. How is this possible? A cow requires more feed than do some lettuce and vegetables, vegetables don't need to be slaughtered, sterilized, frozen, cooked, given antibiotics, etcetera. Basically, I'm arguing that it is simpler to make a salad than it is to make a hamburger.

Well, I had some loose ideas why this situation exists, but now I think I fully grasp the variables at play. My explanation comes from the documentary King Corn. Brief rundown of the movie; two guys move to Iowa, rent an acre of farmland, live with a farmer, plant corn, go around learning what happens to corn after it's harvested, find out almost all of it goes to feeding animals, realize their corn isn't edible, harvest said corn, lose money, and get close to breaking even because of government subsidies.

Let me first start with subsidies. An agricultural subsidy is essentially a financial incentive given by the government to farmers in an effort to change the behavior of the farmers. Carrot = subsidy; horse = farmer. Here's what a subsidy does to an agricultural good, in this case corn:

First, farmers grow more corn because they know that they'll get money from the government to do so. In the movie it was $28 dollars an acre. The actual commodity price they received for their 180 bushels of corn was about $300. Anyways, once the supply curve shifts to the right (increases) you can see that price drops from P1 to P2 and quantity increases from Q1 to Q2. The true market equilibrium is disrupted in favor of an artificial one brought about vies a vie a subsidy that produces more corn.

Prior to the 1970's this meant the government paid farmers to leave fields fallow in an effort to keep commodity/food prices high. They still do this in some cases. The whole system is mind bogglingly complex. Then Earl Buntz came along and told farmers to "get big or get out [and] plant hedgerow to hedgerow." In response farms got huge, small and medium sized farms got pushed out (which is fine it's a natural trend within the market), and food got a lot cheaper. So what's the catch?

Corn got crazy cheap, yields skyrocketed, and now it's in absolutely everything. Over 95% of the corn you've ever seen is completely inedible in its raw state. About half goes to livestock feed, a quarter goes to ethanol production, about a fifth is exported, and a mere 4% is used to make high fructose corn syrup. Which is crazy that that percentage is so small because it's in just about every packaged food and is the main ingredient in soft drinks.

So again, half of all corn is used as feed grain. It used to be the case that cows lived on open grass pastures and ate grass. Now cows are raised that way for the first half of their lives then put in confinement so that they fatten up quickly. During this time they're fed a grain (read: mostly corn) diet. This diet would literally kill the cow if it weren't for the fact that they're slaughtered after about 120-140 days after starting this process. This practice leads to beef that is three times higher in fat and contains less omega-3 fat (a hard to get essential fatty acid). So, more saturated fat and less omega-3; not good. There are a number of other reasons farming cows this way is illogical but you get the point. Bad for you, bad for the cow, and as I'm about to show, bad for your wallet.

So why is a salad more expensive than a hamburger? Because the meat industry is huge (read: efficient) and feeding cows is cheap because of subsidized corn and grain. Farmland that could be used to grow other crops that humans can actually consume ends up as acreage for feed corn. Hence, the price of other vegetables is artificially raised because there is less land to produce it on. The end result is a lot of beef that isn't good for you, cheap ubiquitous soft drinks, high vegetable prices, cheap McDonald's meals, and fat Americans. It's also worth mentioning that subsidies imply a certain degree of inefficiency. The reasoning goes that the government gets its money from you, the taxpayer, so in giving the farmers money to grow something that wouldn't otherwise be profitable they are in fact distorting economic signals.

My solution? Simple - slowly end the subsidies. Let the market decide what it wants and at what prices. It would also mean less bureaucracy.

Side note: ending farm subsidies would make agriculture in the US more of a truly "perfect competition" situation which is really exciting... to me.

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