September/
October 1998
By Tracy Sayler
Library
Back
Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
Most farmers are already familiar with the nonrecourse marketing loan, administered by the Farm Service Agency. The loan, which can last for nine months, allows a producer of an eligible crop to store the production, pledging the crop itself as collateral. The loan proceeds help the producer to pay bills without having to sell the harvested crop when prices are low. Later, when market conditions improve, the producer has the option of repaying his or her loan at principal plus interest or the posted county price (PCP), whichever is lower.
The PCP is supposed to reflect the cash price a producer would receive in his or her county, or essentially, the terminal market rate minus the transportation cost. The market repayment rate for wheat differs by class (spring, winter, durum). Market loan repayments using the PCP allow a producer to repay the loan before it matures at less than the original principal, offering an alternative to forfeiture of the grain pledged as collateral.
For the new crop, a producer also has the option of foregoing a CCC loan and instead receive an LDP, available when the PCP falls lower than the county loan rate. The LDP is a cash payment that does not have to be repaid, and premiums and discounts do not apply. An LDP example: If a county loan rate for spring wheat is $2.74 per bushel and the PCP on a particular day is $2.66, the producer can opt to receive an LDP of eight cents per bushel.
There are caveats with the LDP: The producer must own or retain beneficial interest in the commodity from the time of harvest through the date the LDP is requested. Thus, grain that has already been sold or delivered to a buyer is ineligible. And again, a producer cannot receive a loan and take an LDP on the same bushels. Timing is a key: how the markets close each day will affect the LDP rate the following day.
The LDP option has been triggered for barley and wheat in many areas, and canola, corn, and soybeans may qualify as well. In some North Dakota counties, the LDP for winter wheat reached over 50 cents.
The Minnesota Association of Wheat Growers and the North Dakota Grain Growers Association have been posting daily LDP rates on the groups' Internet web site, and on the groups' "Wheat News" segment on the Data Transmission Network (DTN) and FarmDayta, two electronic information services subscribed to by many farmers and country grain elevators.
FSA offers two different types of LDPs: the regular LDP (form CCC-666 LDP) is requested in the same manner as a CCC loan, after the grain has been harvested and put into storage. The direct sale LDP agreement (form CCC-709) must be filed with FSA prior to harvest. Since the direct agreement locks a producer to the rate in effect on the date of delivery to the buyer, the regular LDP is preferred, since it allows the producer to watch the market and request the LDP when the rate is at its greatest.
Be sure not to sell off the combine until you visit with FSA, and make sure you have the right documentation if grain is stored at the elevator. Otherwise, you may be ineligible for the LDP. Growers are encouraged to visit with their local FSA offices about their loan and LDP options. n
Q & A on Loan Deficiency Payments
By Paul Thomas, NDGGA account manager
What are Loan Deficiency Payments (LDP)?
LDPs are cash payments made to eligible producers who, although eligible to obtain a CCC loan, agree to forgo the loan in return for a payment on the eligible commodity. The LDP becomes available (for new crop only) when the Posted County Price for eligible program crops is less than the county loan rate. LDPs can be taken on both farm stored and warehouse, elevator stored grain.
For example: You live in Burleigh County and you just harvested 1000 bushels of 14% spring wheat and put them in a bin on your farm. The county loan rate in Burleigh is $2.61 per bushel. The high price quoted between Minn. and Portland that morning was $3.40 per bushel. Burleigh County's established differential is 85 cents per bushel. So the PCP for that day is $2.55 per bushel. The loan rate of $2.61 minus the PCP of $2.55, gives you a 5 cent per bushel LDP.
When and why did the government create LDPs?
In 1990 the Omnibus Budget Reconciliation Act of 1990 provided for the implementation of the market loan provisions of the 1949 Act for the crop years 1991-95. These provisions were continued under the 1996 Farm Bill for the crop years 1996-2002. The 1996 Act also capped the National Average Loan rate for wheat at the 1995 level of $2.58 per bushel.
Concerns over large government owned surpluses and the cost to maintain them as well as the negative impact they have on the market led to the implementation of the market loan provisions. These provision are designed to reduce the amount of grain that will be forfeited to CCC in settlement loans.
What does LDP have to do with CCC Loans?
Market loan repayments using the posted county price allow a producer to repay the loan at less than the original principal, offering an alternative to forfeiture. Nonrecourse loans can be repaid anytime during the nine month loan period. Nonrecourse loans may be repaid at principal plus interest or under the marketing loan provisions using the CCC determined value (posted county price).
How do they establish the Posted County Price (PCP)?
The PCP, also referred to as the CCC determined value, is equal to the terminal market rate, as reported by CCC, minus the county differential. The PCP is supposed to reflect the cash price a producer would receive in the county.
In English: The merchandising staff located at the Kansas City Commodity Office provides price discovery mechanisms to your local FSA office. Every morning the Kansas City office posts the prices from 32 marketing centers. The three terminal locations that affect ND wheat are Portland, Duluth and Minneapolis; for durum only Duluth. Each morning your local FSA office looks at the screen and chooses the higher price quoted from the previous day's activities at either Portland or Minneapolis, and subtracts your county's established differential discount to arrive at your Posted County Price (PCP).
The discount factor, or differential, were initially established by CCC for the Payment in Kind (PIK) program in the 1980s. The county differential rates are based on market and transportation factors and are generally higher for counties farther from terminal markets. The differentials are adjusted occasionally to reflect changing market conditions.
If the national average loan rate cap is $2.58, why do county rates differ; say $2.72 for one county and $2.49 for another?
National average is the key word. Loan rates vary from county to county. They are determined based on a formula using the national average loan rate and a 12-month average posted county price and two years of county production data. The loan rate is reflective of the distance from the terminal markets.
The only thing that changes-daily-is your PCP (and subsequent LDP, if it is triggered.) The loan rate is set once a year and your differential is set and is rarely adjusted. The PCP is established based on the previous day's market close, so watch for the market downswing to capture a low for a better repayment rate or greater LDP the following day.
What are some limitations on LDPs I should be aware of?
You cannot get an LDP on grain you no longer control, or in FSA language, you must "retain beneficial interest." For example: you haul 500 bushels to the elevator and sell it. You had the possibility that day of getting a 10 cent LDP but went to the FSA office with your scale tickets after having sold the grain. You just missed your chance for an LDP. You sold the wheat, thus it is no longer yours to receive an LDP on. You must retain ownership to get an LDP. The minute you sell, contract for delivery or delay price your grain, you forgo ownership. If you are planning to sell your grain, be sure to investigate your options with the FSA office before you sacrifice control of the commodity.
You can only receive one LDP payment on each bushel of grain.
LDPs are not a loan; they are a payment, and you don't have to repay them.
You cannot get a LDP and then take out a CCC loan on the same bushels. If you choose to take the LDP you forgo your right to put those bushels under a CCC loan.
Will certain grain market pricing strategies negate LDP eligibility?
Puts and call options should be OK. But you may be ineligible under basis fixed contracts, delayed payment contracts, minimum price contracts, or hedge-to-arrive contracts. Ray Grabanski of Progressive Ag Marketing, Fargo, ND, says that in his opinion, you retain eligibility for an LDP if: you have control over and maintain ownership of the cash grain, if you have a warehouse receipt of stored grain, and if you still have decision-making control with the physical grain. To be sure, you may wish to visit with your local elevator and FSA office before selling or pricing your new crop.
How do I request an LDP?
Same manner as a CCC loan. The request can be on either a farm stored or warehouse stored quantity. Once the crop has been harvested and put into storage the request can be made. The LDP request can either be certified, measured or supported by acceptable production evidence such as scale tickets.