Marketing Loans and Loan Deficiency Payments
For the first time in more than 10 years, wheat producers may need to consider the acronym LDP as part of their marketing decisions. The marketing loan program provides underlying income support tied to a national average loan rate for program commodities. In the case of wheat, that loan rate is $2.94/bushel nationally, adjusted for class and county across the country. The loan rate was far below the market and largely out of mind as the 2014 Farm Bill was being debated and developed, but is now, unfortunately, very relevant given current price levels and projections going forward. If a day's posted county price (PCP) falls below the county's adjusted loan rate, producers may be able to realize a marketing loan gain (MLG) by paying back an outstanding commodity loan at the PCP, or they may be able to claim a loan deficiency payment (LDP) on bushels not already pledged under a commodity loan.
With the passage of time since LDPs were last utilized in wheat, it may have been easy to forget the mechanics. Briefly, PCPs are calculated every day from the higher of the previous business day's grain bids at two relevant major terminal markets adjusted back to the local market. The July 5 PCP and resulting available LDP of $0.06 per bushel provide an example of the program mechanics.
Using Lancaster County hard red winter wheat as an example, the PCP is determined from terminal bids in Kansas City, Missouri (KCM) and the Gulf export market (GLF). Each bid is adjusted by a county differential, essentially a basis or location factor from the terminal market to the local county.
- GLF = $4.29/bushel - $1.12 differential = $3.17/bushel
- KCM = $4.00/bushel - $0.90 differential = $3.10/bushel
- PCP = higher of $3.17 or $3.10 = $3.17/bushel
- Potential LDP = $3.23 loan rate - $3.17 PCP = $0.06/bushel
The resulting PCP for Lancaster County for July 5 is $3.17/bushel, the higher of the two adjusted terminal bids. Compared to a Lancaster County adjusted loan rate of $3.23/bushel, the result is a $0.06/bushel LDP available to producers. The LDP can be claimed in lieu of pledging the commodity as collateral for a commodity marketing loan. If the producer chooses the loan program instead, they can pledge the commodity as collateral for a 9-month loan with proceeds equal to the loan rate of $3.23/bushel less loan processing costs. The loan can then be paid back at the loan rate plus interest if the market price recovers, paid back at the PCP if the PCP is below the loan rate plus accrued interest, or forfeited to the government at expiration of the loan upon delivery to an approved government warehouse. If the marketing loan is repaid at a PCP below the loan rate, the difference between the loan rate and the PCP is a MLG.
The marketing loan provisions were first developed in the 1985 Farm Bill to provide income support to producers while keeping commodities moving through market channels instead of accumulating in government storage as a result of loan forfeitures. For most Midwestern commodities, they have not been a relevant factor in pricing decisions for more than a decade, although they have provided short-term cash flow assistance while producers held a crop in storage. With wheat prices currently reaching down to loan rate levels and projections of more of the same going forward, producers may again need to learn the language of LDPs, MLGs, and marketing loan programs. One change of note under the 2014 Farm Bill is that any LDPs and MLGs are part of the same $125,000 per person payment limit that includes Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) payments.
More information on the marketing loan program as well as daily information on PCPs and potential LDPs is available from USDA's Farm Service Agency at www.fsa.usda.gov/programs-and-services/price-support/commodity-loans/index. A detailed fact sheet available directly at the following link: www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2016/mal_ldp_2016.pdf.
Posted by Brad Lubben, Tuesday, July 5, 2016