Case Study 1 — Corn Farming Near Millbrook: Perfect Competition in the Real World
The corn farms within 200 miles of Millbrook — the same farms that supply raw vegetables to Riverside Foods — are among the closest real-world approximations to perfect competition in the U.S. economy. This case study walks through why, and uses the competitive model to explain what happened to corn farms during the 2012 drought and the 2020–2022 price boom.
Why corn farming is approximately competitive
Many sellers. There are roughly 300,000 corn farms in the United States. No single farm produces more than a tiny fraction of total output. The largest farms produce perhaps 0.01% of national corn supply.
Homogeneous product. Corn is graded by standard USDA classifications. #2 yellow corn from Iowa is identical to #2 yellow corn from Indiana. Buyers don't care which farm it comes from.
Relatively free entry and exit. Starting a corn farm requires land, equipment, and knowledge — but there are no patents, no government licenses (beyond standard agricultural registrations), and many existing landowners who could shift into corn from other crops. Exit is similarly straightforward: a farmer can stop planting corn and plant soybeans instead (or sell the land).
Reasonably good information. Corn prices are publicly traded on commodity exchanges (CBOT). Every farmer can see the current price. Input costs (seed, fertilizer, fuel) are widely known. Weather forecasts are public. The information isn't perfect, but it's much better than in most markets.
The price-taker test. A single Iowa corn farmer cannot affect the price of corn by changing her output. If she plants 500 acres of corn or 300 acres, the effect on the national corn market is unmeasurable. She is a pure price taker.
The 2012 drought
In the summer of 2012, the worst drought in 50 years hit the Midwest corn belt. Yields fell by about 25% nationally. What did the competitive model predict?
Supply shifted left (less corn available at every price). Demand was approximately unchanged (people still wanted to eat, livestock still needed feed).
Short-run prediction: price rises, quantity falls. What happened: corn prices rose from about $6/bushel in May 2012 to over $8/bushel by August — a 33% increase. Total corn production fell by about 25%.
Who benefited? Farmers whose yields held up (those in less-affected regions) earned windfall profits: they sold the same quantity at much higher prices. Farmers whose yields collapsed earned less despite higher prices — the price increase didn't fully compensate for the lost quantity.
Who was hurt? Livestock producers (who use corn as feed) saw their input costs spike. Consumer food prices rose modestly (corn is a small fraction of the final cost of most food products, but cattle and pork prices rose more).
What happened in the long run? By 2013, the drought was over. Yields returned to normal. Corn prices fell back to about $4.50/bushel. The windfall profits from 2012 were temporary. The competitive model's prediction — that short-run profits are competed away by supply adjustments — held. Farmers who had expanded acreage in response to the high prices in 2012 faced lower prices in 2013–2014.
The 2020–2022 price boom
Between 2020 and 2022, corn prices rose from about $3.50/bushel to over $7/bushel — driven by a combination of strong global demand (China buying more corn for feed), supply disruptions (COVID affected planting and harvesting in some regions), ethanol demand recovery, and the Russia-Ukraine war (which disrupted global grain exports and redirected demand to U.S. corn).
Short-run result: farms earned record profits. At $7/bushel and typical yields of 175 bushels/acre, gross revenue per acre was about $1,225 — well above the breakeven cost of about $700–800/acre (including land rent, seed, fertilizer, equipment, and labor).
Entry response: in the competitive model, high profits attract entry. In agriculture, "entry" means expanding acreage — planting corn on land previously used for soybeans, hay, or conservation reserve. USDA data shows that U.S. corn acreage increased from about 90 million acres in 2020 to about 94 million acres in 2023 — a 4.5% increase, directly consistent with the competitive entry prediction.
Long-run convergence toward zero economic profit: by 2024–2025, corn prices had fallen back to about $4–4.50/bushel. The expanded acreage plus normal weather produced abundant supply. The windfall profits of 2021–2022 were gone. Farmers who had locked in high land-rent contracts during the boom were now facing negative economic profits. The competitive model predicts that some of these farmers will reduce acreage (or switch to other crops), shifting supply back left and stabilizing prices at the long-run equilibrium level.
This cycle — high prices → entry → expanded supply → lower prices → some exit → prices stabilize — is the competitive entry-exit mechanism in action. It takes 2–5 years to play out in agriculture (because crop decisions are annual), but it works. And it has worked, with rough consistency, for as long as commodity agriculture has existed.
Discussion questions
- Corn farming approximates perfect competition. Name two ways in which it deviates from the assumptions of the model.
- During the 2012 drought, some farmers with crop insurance earned more than if the drought hadn't happened. Is crop insurance a violation of the competitive model?
- The 2020–2022 boom attracted entry (more acreage planted). The competitive model predicts this should drive profits back to zero. Has it? Look up current corn prices and acreage data.
- "Farmers earn zero economic profit in the long run." Is this consistent with the existence of wealthy farming families? What explains the apparent contradiction?
- Government agricultural subsidies (like crop insurance subsidies and direct payments) affect the entry-exit mechanism. How?