By Brent Gloy and David Widmar
As we discussed last week, U.S. farm income has declined dramatically over the last two years. The magnitude of the drop has been substantial. In real (2009) dollars, the fall from 2013 to 2014 and 2014 to 2015 are the largest absolute declines since 1979 to 1980. In percentage terms, the 2014 to 2015 decline is the largest since 1982-1983.
We thought it would be worthwhile to examine the decline in further detail. As we mentioned last week, persistently high and increasing expenses have played a key role in the decline. We will look at how expenses have changed throughout previous downturns in a later post. For this week’s post we wanted to look at something that hasn’t gone up in this downturn, direct government program payments.
Government Payments Through the Years
Direct government program payments have played a key role in farm economics for decades. Figure 1 shows the annual real value of direct farm program payments from 1960-2015f. One might suspect direct payments peaked in 1987 during the peak of the farm financial crisis. Indeed, they reached a very high level in that year. However, in real terms the direct payments received in 2000 were slightly larger. In fact, payments from 1998 to 2006 were nearly always above $15 billion and sometimes well above that level.
As incomes rose in 2007 direct farm program payments have fallen steadily. Today, direct payments are forecast to be slightly above $10 billion in real dollars. In nominal terms, USDA is forecasting direct payments at $11 billion. This includes a forecast of roughly $5 billion in ARC payments.
Payments Relative to Income
The relative importance of government program payments in supporting income has fluctuated over time. Figure 2 shows the ratio of direct government program payments to net farm income. This is the proportion of net farm income that has come directly from the government. Over the entire period, payments have averaged 21% of net farm income. The lowest proportions occurred in the mid-1970’s and the highest proportion occurred in 1983 when payments made up a staggering 65% of net farm income.
Since 1960 direct payments have accounted for more than 25% of net farm income in 18 years (or 33% of the time). Until recently, the importance of government payments to net farm income has been on a steady decline. However, they still accounted for nearly 10% of net income even in the relatively high profit years of 2011-2013. Today, they are forecast to provide 19% of net farm income, a value that they have reached roughly half of the time since 1960.
Wrapping it Up
We are not particularly interested in getting into a debate about the pros and cons of government support in agriculture. That debate could go on forever. Instead, we think it’s important to describe the facts of the situation: direct farm program payments have provided considerable financial support to farmers over the years and they still provide a considerable amount of income to the U.S. farm sector.
The design of the ARC program suggests that program payments are likely to be relatively large through at least the first two years of this downturn. As the farm sector finds itself in the midst of a second straight year of declining farm profits, one should not look for 2014 Farm Bill payments raise incomes to anything approaching previous levels of profitability. For example, to get back to the long-run average level of income in the sector an additional $18 billion would be required, almost double the current forecast for program payments.
Furthermore, the program’s Olympic averaging calculation method and current commodity price levels set the stage for a substantial decline in guarantee levels. If 2015 conditions were held constant, lower government payments for the 2016 crop and beyond would be expected. As a result, it is clear that government programs will not restore income levels in the farm sector anytime soon. This means that farms will have to be extra diligent to control costs and prepare themselves for this challenging economic environment.
Photo Source: Flickr/USDA NRCS South Dakota