South-Western College Publishing - Economics  
Farmers Dump on Canada for Dumping
Subject Comparative Statics
Topic Perfect Competition
Key Words Imports, Tariffs, Dumping, Demand, Revenue
News Story

Farmers and ranchers have blockaded Canadian border crossings. Also officials in North and South Dakota are pulling Canadian trucks over and are subjecting them to tougher inspections. The reason is that U.S. farmers are alarmed at the growth in imports since tariffs were removed in 1995. They claim that Canadian farmers are dumping grain at prices below cost.

Not all agree. Some say that the Canadian grain was purchased because it was free of disease, unlike American grain in recent years. Adding to the pressure on grain prices have been bumper crops in areas such as the Northwest. Overseas demand has also decreased due to the Asian currency crisis.

One study claims that barley and durum farmers in the upper Midwest had lost nearly $270 million in revenue due to dumping practices by the Canadians. One farmer pointed out that small towns were drying up because farmers had little money.

(Updated November 11, 1998)
Questions
1. The Canadians are blamed by U.S. farmers for lowering the price of grain.
  a) Draw a set of two diagrams, one depicting supply and demand in the U.S. grain industry, the other showing average total cost, marginal cost, and marginal revenue for a representative farm that is breaking even. Mark the equilibrium price and output in each diagram.
  b)Show the effect of increased Canadian grain imports on the industry price and output and the representative farm's price, output and profit. In the industry diagram, disaggregate the equilibrium output into U.S. grain and imported grain.
  c) Based on what you have drawn, explain why U.S. farmers are so unhappy.
   
2. Other causes of low grain prices include lower demand from Asian consumers.
  a) Draw a further set of two diagrams of the U.S. grain industry and a typical farm. Show the equilibria. Assume that the farm is initially breaking even.
  b) Illustrate the effect of lower Asian demand on the U.S. grain industry's price and output, and the typical farm's price, output and profit.
   
3. Farmers are worried.
  a) Given your responses to Questions 1 and 2, and assuming that this industry is perfectly competitive, what will happen in the long run? What will happen to price, output and profit?
  b) Illustrate your argument on the diagram in Question 2.
Source Associated Press, "Midwest Farmers Running Out of Options in Protest on Imports", The New York Times, September 23, 1998.

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