Producers are waiting for the U.S. Department of Agriculture to release meaningful information about how Market Facilitation Payments 2.0 might impact their farm’s financial projections. So we thought it would be helpful to provide context about all forms of direct payments in 2019. Specifically we are reviewing direct farm payments and how the latest round of trade aid will significantly increase direct farm payments in 2019.
Data, assumptions, comments
The USDA’s net farm-income projections from March 2019 – the latest data- were used as the baseline for 2019 direct payments and farm income. From that Market Facilitation Payments 2.0 payments for 2019 were assumed to be two-thirds of the total estimate of $14.5 billion, or $9.7 billion. The third round of payments would be paid in early 2020. Of course the second and third Market Facilitation Payments are not guaranteed.
The $9.7 billion in Market Facilitation Payments 2.0 were added to the March 2019 projection of income and direct payments.
Direct payments not records
The USDA’s initial projection was for $11.5 billion in direct payments. Readers will remember we said that was part of an optimistic farm-income projection that included increased income with decreased direct payments and production expenses. These payments include carryover payment from Market Facilitation Payments 1.0 of $3.5 billion, conservation of $4 billion, and Agriculture Risk Coverage-Price Loss Coverage payments of $1.7 billion. With an additional $9.7 billion in Market Facilitation Payments 2.0 payments paid in 2019, that would push total 2019 direct payments to $21 billion. Many have emailed and asked if that would be a record for payments.
Figure 1 shows annual direct payments since 1933. The data are in nominal terms – not adjusted for inflation. From 2009 to 2018 – the past 10 years – direct payments have averaged $11.5 billion. Furthermore payments during that period were greatest in 2018 at $13.8 billion. That recent history is why the expectation of more than $20 billion in payment in 2019 has been such an eye-popping number.
That said, 2019 is not likely to set a record. In the late 1990s and early 2000 direct payments four times exceeded $20 billion, in 1999, 2000, 2001 and 2005. In 2005 direct payments reached $24 billion.
Given the long time series, it’s helpful to consider direct-payment data in real terms – or inflation-adjusted. Those data show that direct government spending in the past has five times exceeded $30 billion in 2019 dollars, well more than current levels. On the other hand 2019’s estimate of $21 billion in direct payments has only been exceeded nine times during the past 87 years. That is to say current levels are historically great but remains at less than record levels.
Payments not record relative to farm income
A third way of considering direct farm payments is as a share of sector net-farm income. Simply put, the measure tells us what percentage of U.S. net farm income came from direct payments.
At the height of the farm-economy boom, direct payments accounted for about 10 percent of farm income between 2011 and 2013. Keep in mind conservation programs – like the Conservation Reserve Program – are included here. As net farm income decreased and the Agriculture Risk Coverage-Price Loss Coverage programs came into play, farm payments have accounted for a growing share of farm income. In recent years that has been about 20 percent of farm income. In 2019 direct payments account for 27 percent of farm income.
We’ve seen direct payments play a much large role in the past. During the farm financial crisis in 1983 and 1987, and in 1999 and 2000, that measure exceeded 40 percent. In 1983 when net farm income was dismal, net farm income was 65 percent of net farm income.
Direct payments categorized
The final way we looked at the data is by type of spending program. The only consistent program during the past 10 years has been conservation. Conservation has frequently been 20 percent to 30 percent of total direct farm payments.
Prior to 2014 fixed direct payments were a big share of direct payments. The 2014 Farm Bill phased that program out in favor of Agriculture Risk Coverage-Price Loss Coverage. Agriculture Risk Coverage-Price Loss Coverage spending started in 2015 – the mechanism where payments are made a year after harvest. In 2014 half of direct payments were disaster payments – mostly to livestock producers.
For 2018 and 2019, it’s worth noting how significant Market Facilitation Payments have been. Market Facilitation Payments 1.0 accounted for 38 percent of 2018 payments and 17 percent of 2019 payments. Market Facilitation Payments 2.0 will account for 46 percent of all direct payments in 2019 – as well as a significant share of 2020 payments. In total, the payments in 2019 – 1.0 plus 2.0 – will account for 62 percent of all direct payments made in 2019.
It’s worth pausing to think about what it means when Market Facilitation Payments are such a large share of direct payments in recent years. A majority of 2019 direct payments were funded and authorized outside of new Congressional action and the current farm bill. While there isn’t a measure for reviewing how successful a farm bill performs, one must at least consider the possibility that the recently approved 2018 farm bill has failed when more than 50 percent of direct payments were authorized outside of the months-old legislation.
Wrapping It Up
Our recent post on work capital underscores the dire situation facing the farm economy. While Mother Nature’s 2019 supply-management plan will likely provide some relief, that alone won’t likely be enough to return net farm income to stable sustainable levels.
Market Facilitation Payments 2.0 will likely push 2019 direct payment to more than $21 billion, much more than levels observed in recent memory. That said, direct payments – by many measures – have been more in the past. Direct payments exceeded $30 billion – in 2019 dollars – during the 1980s, and again in 1999 and 2000.
Looking ahead, one must wonder how agricultural policy will play out in the next five years or so. The current farm bill – approved in late 2018 – is already being bypassed by the USDA and White House with other funding mechanisms. Furthermore the Market Facilitation Payments 2.0 comes after the USDA adamantly spent most of 2018 saying there wouldn’t be further rounds of payments. Both of those realities emphasize the severity of the trade war and the overall difficult farm-economy outlook. A very real possibility is that the Market Facilitation Payments will continue for as long as the trade war continues. While the payments have been helpful, the mechanism for allocation and distribution has left a lot to be desired.
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