With the fiscal issues of our federal government every farm program will be scrutinized and many may be eliminated. The direct payment program has a large target on its’ back. The origins of the direct payment come from the Federal Agriculture Improvement and Reform Act of 1996. Direct payments were intended to be a transitional payment away from government support but have continued under the previous two farm bills.
I’ve read several articles recently discussing the impact of eliminating direct payments on land values. In one article it mentioned a Mid-West land broker indicated direct payment elimination will have no impact on land values. The same article presented the case direct payments could have a major impact on land values in the Delta region. In my opinion land values in the Delta will be negatively impacted, but the impact will not be equal across farmland or producers.
Below are a few scenarios of how I see eliminating direct payments will impact landowners and producers scenarios. The scenarios vary from little to a significant impact.
Very Little Impact
Within our management portfolio we have several farms with no rice base acreage or very little compared to actual production. These farms have small direct payments due to having base acres of dryland soybeans, sorghum, and wheat. Improvements have been made and the farms are now producing irrigated crops from corn to rice without any base acreage of that commodity. Elimination of direct payments will have very little impact on landowners or producers under this scenario.
A farm with an average of $50/acre in direct payments could see land values drop moderately in the short term. From an investment standpoint a landowner probably capitalizes a portion of the direct payment into the land value. Under a typical 25% net share rent, a landowner would receive $12.50/ac in direct payments. Using a capitalization rate of 5%, the value of direct payments would equal $250/ac. If the land is worth $2,500 with direct payments, it would be worth $2,250 without direct payments. This is a 10% decrease in land value. Both landowner and producer will be moderately impacted under this scenario. Producers may see tighter margins without direct payments and lenders may increase their risk premium to cover additional risk on production loans.
Eliminating direct payments will have a major impact on landowners who have just collected direct payments, not produced a crop, and neglected maintenance. Without direct payments their land will become a liability instead of an asset due to paying property taxes and having no income. At this point the landowner will have to sale at a discount, sink money into fixing the farm, or rent at a discounted rate due to the improvements that will be necessary to bring the land back into production.
This same scenario will occur on farms that have not been maintained and are marginally productive with direct payments. Once direct payments are eliminated the farm may go idle unless capital is sunk into improvements. Producers under this scenario will most likely go out of business without direct payments. Usually under these scenarios the producer is using direct payments to cover family living expenses or their cash rent and will not cash flow if direct payments are eliminated. Without direct payments, some lenders may be unwilling to make higher risk loans.
Not all landowners and produces will be hit equally by eliminating direct payments. Landowners who have maintained and improved their farmland along with efficient producers will feel very little impact. Some landowners and producers will have a moderate impact from losing a significant income stream but will continue to produce. Landowners who have not reinvested in their land or left it idle will have difficulties leasing and may be forced to lease at a discounted rate or sale their non-income producing asset. Less efficient producers who rely on direct payments as a main source of income will unfortunately be forced out of production.