Government Payment Spigot

Government Payment Spigot

The year 2020 has been one for the record books concerning global economic disruptions and various programs to bridge the resulting financial gaps. This support has included the Federal Reserve and central banks around the world maintaining a policy of low interest rates and pumping money into the economy. On the other hand, stimulus checks and extended unemployment benefits in the U.S. and globally have been a measure to bring a sense of normal to turbulent times.

Drilling down to the agriculture industry, the government support spigot has been flowing to many commodities and industries not only in the United States, but globally. A movement away from government support payments for decades due to increased globalization, free markets, and increased net income generated from export markets has appeared to take a hiatus. The question then becomes whether this increased government support is permanent or temporary in the United States and for our global agricultural competitors.

The movement towards more government support for agriculture was occurring before the COVID-19 pandemic. So far in 2020, $2 billion per day of government supports have been extended to lift the fortunes of agriculture producers worldwide. The trade sanctions and trade wars in the past few years resulted in export barriers which reduced revenues and net income to agriculture. Nationwide, exports represent one in five dollars of net farm income. The resulting income gap from reduced exports was filled by various payments for farms and ranches.

The proof is in the pudding when one examines the FINBIN database from the Center for Farm Financial Management at the University of Minnesota which covers over 20 states with thousands of farms enrolled in the program. Recent data shared at the 2020 Minnesota Crop Insurance Conference illustrates how important the government support payments are in terms of farm financial performance.

An analysis of 2019 government support payments as a percent of net farm income was conducted. For the grain and crop sector, 95 percent of net farm income was from a government check. The dairy industry represented in the database received 35 percent of net farm income from government support payments. Moving deeper into the protein sector, 93 percent of net farm income for hog producers was government derived. An astounding 115 percent of net farm income was from government payments in the beef industry.

How is 2020 shaping up? The 465 crop insurance professionals present at the conference were surveyed. They were asked, “How have government support payments in 2020 impacted net farm incomes and cash flows for your customer base?” Fifty-nine percent stated that payments had a large impact while 29 percent felt it was a modest influence. Only 5 percent indicated a slight impact. Yes, the PPP and other government programs have been generous to some industries and individuals. A farm management consultant I recently spoke with indicated the year 2020 is one of economic divide. The segment of producers that have performed well economically along with government support payments will have their best year since the commodity super cycle. Others who have struggled financially as a result of adverse weather, loss of markets, mismanagement, or other unfortunate events will continue to perform at a level similar to the years of the economic reset. The government checks will help to supplement their cash flow temporarily.

Beyond 2020

The question then becomes what will happen in the future and are there tools that can be used to assess the business? The post-election economies in the U.S., Germany, and other major economic powers will be uncertain. How much longer will governments around the world continue to financially support agriculture at these levels? How will other segments of the economy that need assistance be prioritized in the scheme of importance? How will U.S. producers’ competitive position be impacted if other producing nations continue to provide support? Eventually, what will be the price to pay from all of the support packages? Will the future bring higher local, state, and federal taxes? Will there be an increase in the wealth tax or on capital asset sales? These tax increases could be particularly challenging for many agriculture producers who are in the midst of a business transition.

A key trend analysis to conduct for all farms and ranches is to determine what percent of net farm income resulted from government checks. How will farms and ranches perform with a 25, 50, or 75 percent reduction in government support payments? What is the post pandemic plan to make up for the net income loss if government support payments are reduced? How have the monies received from the government be used? Have the funds bridged a financial loss, been used to expand working capital, or to build equity? These are major questions and critical thinking topics for post-harvest planning.

The old saying, “I am from the government and I am here to help” is applicable. This has happened, but what will occur if Uncle Sam turns off the spigot?

A case for globalization and fair, equitable trade deals may be a major priority moving forward. Whether it is the United States-Mexico-Canada Agreement (USMCA), TransPacific Partnership (TPP), or agreements with China, Europe, and other nations, the balance of government support payments and regional and global trade may establish the fortunes of the agriculture industry for the decade of the 2020s.