After the U.S. Department of Agriculture and the White House announced the 2019 Market Facilitation program, we noted that direct government payments were set to soar in 2019. The USDA’s most recent estimate of $19.5 billion in total direct farm payments is more than $5.5 billion more than 2018. The USDA’s initial estimated 2019 direct payments were $2.5 billion less than 2018 levels. This week’s post is an updated look at direct-payment trends and farm-level implications.
Direct payments have long history
Figure 1 shows real or inflation-adjusted direct farm payments since 1933 – 2019=100. As many would expect, 2019’s current estimate of $19 billion is at well more than recent levels. Specifically during the previous decade of 2009-2018, real direct payments averaged $12.7 billion and never exceeded $15 billion.
While $19 billion is a lot during recent memory, inflation-adjusted direct payments have exceeded $20 billion multiple times in history. Direct payments exceeded $30 billion as recently as 2005.
Don’t be surprised to hear total direct payments in 2019 exceed $20 billion before the year is finished. The current 2019 estimate includes the first tranche of Market Facilitation Program payments. The USDA has all but promised another round of payments will be made in 2019. Those second-round 2019 payments will be in addition to current Market Facilitation Program and direct-payment estimates.
Another consideration is how large direct payments are relative to net farm income. Figure 2 shows those data since 1933. When farm incomes were recently better, direct payments equaled 10 percent of net farm income. As farm income decreased, direct payments played a more-significant role. The current USDA data indicates direct payments will equal 22 percent of net farm income. Similar to the trends in Figure 1, current levels are large in recent memory but are not record-breaking. In the late 1990s and early 2000s, direct payments frequently exceeded 30 percent of net farm income. During the Farm Financial Crisis of the 1980s, direct payments in 1983 reached 65 percent of net farm income.
Payments come from various sources
There are multiple sources of direct payments. Figures 3 and 4 consider direct payments across various categories.
Figure 3 breaks spending into eight categories, though the USDA has more than 20 categories reported. The first observation is that there is a consistent baseline of conservation spending at about $4 billion annually. Between 2010 and 2018 spending on conservation accounted for 32 percent of total direct payments.
The second observation has been the transition from fixed direct payments to the Agriculture Risk Coverage and Price Loss Coverage programs under the 2014 Farm Bill – and continued in the 2018 farm bill. Fixed direct payments for 2010 through 2013 were an average of $5.3 billion annually. In total the Agriculture Risk Coverage and Price Loss Coverage programs have paid a similar amount of money. Between 2015 and 2019 the average annual payments have been $5.4 billion. Of course the current program has been lumpy in making payments. The Agriculture Risk Coverage and Price Loss Coverage programs paid a best total of $8.5 billion in 2015 but will only pay $2.3 billion in 2019 – the least so far. Notice how Market Facilitation Program payments have largely dominated, mainly in 2018 and 2019.
Figure 4 shows the same data but in a different format. Specifically the categories represented the percentage of total spending for each year. The chart makes it a bit clearer that 2018 and 2019 Market Facilitation Program payments account for 55 percent of current estimated direct payments. As mentioned earlier, 2019 Market Facilitation Program payments will likely increase before 2019 is finished.
Farm-level implications considered
Figure 4 uses data from the Kansas Farm Management Association to consider the farm-level conditions of direct government payments. The graph shows the annual value of farm production, in blue, and government payments, in orange, from 2004 and 2018. Prior to 2018 government payments equaled about 5 percent of the total value of farm production. But in 2018 government payments – driven largely by that year’s Market Facilitation Program – jumped to 9 percent. Keep in mind that a portion of the 2018 Market Facilitation Program payments were made in early 2019. That sets the stage for government payments to be an even-larger share in 2019.
Figure 5 shows the same government-payment data in Kansas, but now relative to net farm income. While farm income has increased from the 2015 amount, government payments stayed mostly flat until the 2018 increase. In 2016 and 2017 the average farm in the benchmark had about $28,000 in government payments. Government payments in 2018 almost doubled to reach an average of $54,700. The increase in government payments of $26,467 was almost 80 percent of the increase in net farm income between 2017 and 2018.
Wrapping it Up
We have discussed in previous posts that net farm income in 2018 and 2019 should be denoted with an asterisk. While income has increased, the improvement was accompanied by an increase in direct farm payments due to 2018 and 2019 Market Facilitation Program payments. At least 55 percent of total direct payments in 2019 will come from the Market Facilitation Program.
One understated aspect of the Market Facilitation Program has been the unconventional nature of the program. The program has been ad hoc from year-to-year – a year ago the USDA said producers shouldn’t expect a 2019 program. It’s also been ad hoc concerning a round of payments. While producers have already received some payments for 2019 production, many unknowns remain about the second 50 percent of the potential 2019 Market Facilitation Program payments.
When thinking about 2020 producers face a difficult budgeting situation. First they have uncertainty about the remaining Market Facilitation Program payments. That can have a big impact on cash flow and working capital as they finish 2019 and begin 2020. And producers will likely need to plan and budget 2020 as if no Market Facilitation Program payments were coming. That said, they mostly expect a third year of payments. When asked in October, the Purdue/CME Group Farm Economy Barometer found 62 percent of producers expected a Market Facilitation Program in 2020.
Producers should carefully review how government payments have impacted their operation, especially Market Facilitation Program payments. In the data from Kansas farms, the Market Facilitation Program pushed total government payments from 5 percent to 9 percent of the value of production in 2018. Furthermore the approximate doubling of government payments accounted for 80 percent of the increase in farm income between 2017 and 2018.
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