The U.S. Department of Agriculture recently announced the Coronavirus Food Assistance Program. Like the Market Facilitation Program, this is another ad hoc farm program that will sharply increase direct farm payments. This week’s post is a review of direct farm payments and a look at what might be in store for 2020.
Direct payments increase
Figure 1 shows inflation-adjusted direct farm payments since 1933 – in 2020 dollars. The jump in direct payments in 2019 grabbed a lot of attention but context is always important.
The first point to keep in mind is there is a base level of program payments between $10 billion and $15 billion. Before the trade war the Agriculture Risk Coverage, Price Loss Coverage and conservation programs accounted for most of the dollars spent. At about $4 billion annually, conservation spending was the largest category in the USDA’s February estimate for 2020. It edged out combined spending on Agriculture Risk Coverage and Price Loss Coverage.
To really dig into direct payments through time one should consider net government transfers. One way of thinking about direct payments is they act as a mechanism for offsetting a portion of the local and state-level property taxes that producers face.
The second point to consider is that direct payments have typically increased during challenging times in the farm economy. Most notably in the late 1980s, late 1990s and early 2000s direct payments exceeded $30 billion. Most recently direct payments were $14 billion in 2018 and $24 billion in 2019.
Share of farm income varies
Another way of considering direct payments is as a share of net farm income. In 1983 direct payments accounted for 65 percent of net farm income. It should be noted that net farm income in 1983 was at rock bottom and direct payments approached what were for that time historically inflated amounts. Between 1983 and 1993 direct payments accounted for an average of 32 percent of net farm income.
In 2019 direct payment accounted for 25 percent of net farm income. Just a few years earlier direct payment reached 21 percent of income in 2016 when income slumped and Agriculture Risk Coverage and Price Loss Coverage payments jumped.
We previously noted producers should keep a similar measure in mind for their operations. Market Facilitation Program payments while helpful were ad hoc and not guaranteed in upcoming years. That made it important to consider the magnitude of such payments when evaluating financial performance in 2018 and 2019. As we look ahead that will likely be an important consideration for producers in 2020 as well.
In February the USDA estimated $14.98 billion in direct payments to producers in 2020. That figure included $3.6 billion in Market Facilitation Program payments from 2019 production that was paid in 2020 – the final 25 percent was paid in early January.
The USDA’s Coronavirus Food Assistance Program announcement in May noted $16 billion would be direct payments. A large share of Coronavirus Food Assistance Program funding would go to livestock producers, who were mostly left out of Market Facilitation Program payments. About $5 billion went to cattle producers and $3.5 billion went to row-crop producers.
Figure 3 shows direct payments through time, along with estimates for 2020. The first 2020 estimate, in orange, is the USDA’s February value. That now-outdated estimate would have represented a sharp decline from 2019 but a return to normal. In black is our May 2020 estimate of $30.98 billion – the USDA’s February estimate of $14.98 billion in addition to $16 billion from the Coronavirus Food Assistance Program. That’s to say that all signs point to direct payments in 2020 approaching record levels.
That said there are three considerations to keep in mind.
- Agriculture Risk Coverage and Price Loss Coverage payments made in 2020 for 2019 production could increase from the initial February estimates. A majority of crops for the 2019-2020 market year were sold before prices decreases so some adjustments are likely.
- The Coronavirus Aid, Relief, and Economic Security act is set to replenish in July the USDA’s Commodity Credit Corporation account with $14 billion. It’s unclear how this money will be used but it could be spent for additional direct payments.
- There could be further legislative action. For example there have been calls to increase the Commodity Credit Corporation’s line of credit, and the U.S. House-approved HEROES Act included some $16 billion in additional direct-payment funds.
The USDA’s next update of the data will be in August. Between now and then it’s possible for some combination of Congressional and/or administrative action to result in new or expanded programs. To that point keep in mind that the Coronavirus Food Assistance Program in May did not include support for row crops raised in 2020.
Wrapping it Up
We’re not interested in debating the pros and cons of government support in agriculture. Furthermore we’re not arguing what an appropriate level of funding in 2020 should be. But it’s important to describe the facts of the situation. Direct farm payments have been an important source of financial support for farmers through the years. Those payments have typically increased during times of farm financial stress. Direct payments in 2020 are positioned to increase significantly, with additional programs and payments still possible. The possibility of direct payments hitting – or even exceeding – historic records underscores the challenges facing an already precarious farm economy.
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