If you're in Yuma, AZ you MIGHT be okay with the pallets directly on the ground like that, but they'll probably last longer if you have them sitting on pavers or the 4x8x16 cinder blocks- even in the desert. If you choose only to coat/paint them, be sure to lift them up and coat the underside that is in direct contact with the ground.
Any updates? I'd be interested in seeing what changes you have made.