November 9, 2020

Government Program Payments, What’s to Come?

By Brent Gloy

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The farm economy has gone through many ups and downs over the last 50 years. Along with that, government program payments have also been through their highs and lows, but 2020 will go down as the year that farm program payments achieved their all-time highs. And that is true both in nominal and real terms. As we evaluate where the farm economy is today, it is nearly certain these payments have played a significant role in stabilizing what would have otherwise been a turbulent farm economy. Much less certain is how much these programs will provide going forward. This week’s post reviews direct government payments and considers what might be in store for 2021.

2020

To put the magnitude of 2020’s government program payments in perspective, figure 1 shows (inflation-adjusted to 2020) direct farm program payments since 1970. Never before have inflation-adjusted payment levels exceeded $35 billion. Today, ERS estimates that they will reach $37 billion. The final number will likely come in higher with the additional CFAP money that was recently released.

This level of payment is by far the largest ever seen in the farm sector, topping 2000’s $33.6 by $3.6 billion. The next closest level was seen in 1987 when payments reached $33.2 billion. In fact, 2020’s payments actually exceed the combined totals paid in 2019 and 2018 (and 2019 was the 10th highest payment year in the last 50 years).

 

2021 Farm Direct Payment
Figure 1. Real Government Program Payments to Farmers, 1970-2020f. Data Source: USDA ERS.

 

To get a feel for the effect these payments have had on the farm sector, consider real net cash farm income less government program payments (Figure 2) and net cash farm income with the payments in figure 3.

2021 farm direct payments
Figure 2. Real Net Cash Farm Income Less Government Program Payments, 1970-2020. Data Source: USDA ERS.

 

farm direct payments
Figure 3. Real Net Cash Farm Income 1970-2020. Data Source: USDA ERS.

These payments have resulted in what would have otherwise been a downward trending farm economy turning into an upward trending economy. Consider 2020, with the government program payments net cash farm income is the 8th highest in the last 50 years. Without the payments, it would have ranked as the 30th highest. This would have put it right on par with pre-payment levels seen throughout much of the 1980s.

Moving Forward

Government program payments have been significant for the last several years, but 2020 will go into the history books as the largest year of farm program payments in U.S. history. These payments have gone a long way toward providing much-needed stability in farm incomes and finances. But perhaps the biggest question is: how will program payments evolve going forward?

This, of course, will depend on a whole host of factors, but the biggest is the level of ad hoc support in the near future. We have documented very well that most of this support has come from ad hoc payments outside the farm bill.

These have come under two main rationales. The first large amount was under the market facilitation program (MFP). These payments were designed to offset some of the economic effects of the U.S. trade war. While one can argue about the magnitudes and structuring of the payments, it is absolutely clear in our opinion that the trade war had a large economic influence on the U.S. farm sector.

The second and most recent set of payments were made to alleviate some of the negative economic effects associated with COVID-19 and economic slowdown. The economic influence of this event was also significant. The pandemic and the economic need associated with it arose quickly, and it was clearly difficult to actually estimate and plan for, making it hard to right-size and direct program payments to the sectors most in need.

Wrapping it Up

Going forward, one must hope there are fewer economic disruptions, especially the magnitude of the trade war and COVID-19, in agriculture’s future. If so, one would expect that farm program payments are in for a sharp decline in the coming years. In 2017, the last year before the trade war, direct farm program payments totaled $12.1 billion and accounted for 11% of net cash farm income. This was also very close to the average level of program payments from 2014-2017.

How the ongoing COVID-19 situation unfolds will likely have a significant bearing on how ad hoc government support to agriculture plays out in the coming years. For now, we would expect these levels of payments won’t be seen again anytime soon. If so, farmers and agribusinesses need to begin to plan on a post ad hoc payment world in agriculture.

To help decision makers navigate the uncertainty of direct payments in 2021, we’ve added a question to the Ag Forecast Network about this. Specifically:

“What is the probability of direct farm payments in 2021 exceeding $18 billion, per the USDA’s November 2021 net farm income forecast?”

Log-in to read the question’s background piece, log your forecast, and see what others are thinking.

 

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