Peanuts no long cost peanuts after China subsidises soybean production

The Financial Times reported earlier this week (paywalled):

Peanuts have become China best-performing agricultural commodity as dry weather and Beijing’s policies have eaten into supplies, raising traders’ fears that demand from the world’s largest importer of the legume will push up international prices.

China suffered a severe drought in key growing areas last year, while the government’s agricultural subsidy programme, which favours soyabeans, has led to a sharp drop in the country’s peanut acreage...

Beijing has yet to announce official production figures for 2022, but Chinese media have begun sounding the alarm in recent months, warning that government subsidies encouraging farmers to raise corn and soyabeans, a rival oilseed, had pushed farmers to abandon peanut planting in pursuit of greater returns from other crops.

Consider the market for soybeans, shown in the diagram below. Without the subsidy, the market is in equilibrium, with a price of PA, and QA tonnes of soybeans are traded. The subsidy, paid to the farmers (the sellers in this market), is represented by a new curve S-subsidy, which sits below the supply curve. It acts like an increase in supply, and as a result the price that soybean buyers pay for soybeans falls to PC. The farmers receive that price, and then also receive the subsidy from the government, so in effect they receive the higher effective price PP. The difference in price between PP and PC is the amount of the subsidy. The lower price for consumers, and the higher effective price for farmers, leads the quantity of soybeans grown and traded to increase from QA to QB. As noted in the article, farmers grow more soybeans.

Now consider what happens in the market for peanuts, as shown in the diagram below. Farmers have shifted agricultural production to soybeans, because of the subsidies (as shown above). This, along with the dry weather, reduces the supply of peanuts from S0 to S1. This increases the equilibrium price of peanuts from P0 to P1, and decreases the quantity of peanuts traded from Q0 to Q1.

So, you can see that Beijing's agricultural subsidies flow through to the prices on non-subsidised products as well. Both soybeans and peanuts (as well as products derived from soybeans and peanuts) are going to cost more as a result.