Market facilitation payments (MFPs) have become an integral part of farm income. Leading university agricultural programs have created financial simulations for farm values, taking into account cash rents, project MFPs and the impact of trade policies. It is interesting to study these forecasts, although actual farmland values will be influenced by many other factors unique to their specific locations.
We recently sat down with Howard Halderman to discuss MFPs and the impact they've had on farm operations and farmland prices over the past couple of years.
Howard, can you tell us what MFPs are?
Sure. An MFP is a USDA payment to farmers to offset price erosion stemming from adverse crop prices - in this instance, from the trade war with China. The recent round of MFPs has primarily been related to soybeans, but other crops, including corn, can have MFPs as well.
Where are MFPs trending for the balance of 2019 and 2020?
It's really hard to tell. We are taking a fairly optimistic view with our clients that there may be an easing of the trade war with China. With a lot of MFPs relating to support for soybean prices, it will be beneficial to have China come back into the U.S. market and get prices back up to over $10/bushel, where they were before the tariffs.
Looking back, a first tranche of payments was made in August of 2019, and a second tranche paid during Thanksgiving week. The third tranche is scheduled for January, but will depend on the status of the trade war.
What are some other factors that influence MFPs?
One thing we see is that when tariffs are introduced, the supply curve can change structurally. Another way of saying this is that supply shifts away from the U.S. to other countries, like Brazil and Argentina in the case of soybeans. So if there is a long-term change in demand, it can potentially affect long-term crop prices and farmland values.
Speaking of farmland values, how do MFPs affect them?
Well, I tell my clients that MFPs have had a stabilizing effect on farmland values. In fact, we've seen that with MFPs, farm income has actually crept up a bit. Of course, in order to sustain this income, production has to be good and it helps if the weather cooperates for planting and harvesting.
We are also seeing pretty favorable pricing: this past June, there was an opportunity to sell $10/bushel soybeans and $4/bushel corn.
How is 2020 going to be for farmland values?
We predict continued stability. The fourth quarter for 2019 is looking stronger than the previous three quarters. One mitigating factor we could see is if there is an uptick in the number of farms coming onto the market. Some farmers have been struggling with their operations, and a glut of farms entering the market at the same time could potentially force farmland values to trend downward, at least in the short term.
Halderman Real Estate and Farm Management provides expert guidance on MFPs and other key issues that affect farm profits and farmland values. We look forward to speaking with you about your particular farm operating and investment needs.