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The government payment spigot

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How have government payments in 2020 impacted the net income and cash flows of your customer base?

Decades ago, there was a television show called Lost in Space where the robot would often warn the main character when there was a sense of adversity by saying, “Danger, Will Robinson!” Fast-forward to the 21st century where my mode of communication with the agriculture industry recently is largely via webcast interaction and polling. If I were in the robot’s position, the danger sensor for agriculture producers would be the buildup of government payments as a percent of both revenue and net farm income.

The following question was posed during a recent webcast with over 465 crop insurance professionals, How have government payments in 2020 impacted the net income and cash flows of your customer base?” These individuals were based in the Midwest and Upper Midwest. Fifty-nine percent indicated that government checks had a large impact while 29 percent reported a modest influence for a combined 88 percent! The remainder of the respondents were either neutral or indicated a slight impact.

To further analyze the situation, one of the FINBIN team members at the University of Minnesota’s Center for Farm Financial Management provided actual data from their 2019 agricultural finance summaries, which are amongst some of the best in the United States. Ninety-five percent of the net farm income for crop and grain producers was from a government check. For hog producers, 93 percent of net income was from government support payments. However, for beef producers it was an astounding 115 percent. The tally came in at 35 percent of net income for dairy producers. The government payments as a percent of net farm income will certainly be interesting in these future data summaries with the number of agriculture support programs in 2020 as a result of the COVID-19 pandemic.

A recent conversation with an experienced farm consultant provided some interesting perspective concerning the numbers and the 2020 bottom line profit results that he expects. He stated that approximately half of his producers are experiencing the best year since the great commodity super cycle as a result of solid performance with the extra government payments being “icing on the cake. He jokingly stated that this set of producers will be concerned about paying too much in income taxes. On the other side of the spectrum is the segment of producers who are relying on the support payments for cash flow survival.

The danger in these numbers will be the what if financial scenarios. What happens to a producers income if the government support payments are cut by 25, 50, or 75 percent? What will the agriculture industry’s image be to nonfarm voters? Dangerous white waters could be around the bend for many producers. “Danger, Will Robinson!”

Source: Dr. David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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