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	Issue 31 Marketing Guide 2000


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	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.

Don't overlook advantage of the 60-Day PCP lock

By Betty Thom

One of the most overlooked marketing tools in times of below-loan prices is the government 60-Day Lock option, says Michael Lockhart, farm business management instructor, marketing club leader, and Ulen, MN producer.

"It's a relatively new option which become available toward the end of bean and corn harvest last fall," Lockhart explains. Many producers already took the LDP on their wheat so weren't eligible for this program at that time.

"But it's available again for the 2000 crop and should be looked into as a serious option," he says.

Here's how it works.

A producer must take a government loan for the commodity. The loan is based on the county loan rate. A small service fee of not more the $45 per loan plus $3 per extra bin (or warehouse receipt) will be deducted from the loan. Also, there may be a small assessment fee on some commodities. Producers need to file form CCC-697, UCC-11 lien search and UCC-1 financing statement.

The producer keeps the beneficial interest of the commodity during the loan period. Any time during the 9-month loan period, the loan can be bought back at the posted county price (PCP). When the maturity date is reached, there are two options:
1) The producer can pay off the loan at the loan rate plus interest keeping the beneficial interest of the commodity, or
2) the commodity is transferred to the CCC.

That part of the program has remained the same for several years.

The 60-day lock option can be exercised once any time during the 9-month loan period. Activating the lock means the producer locks in the PCP on that day. For the next 60 days (or until 14 days before loan maturity date) the loan can be bought back at this locked-in price. If the producer chooses not to buy the loan back in the 60 days, the loan buy back options revert to the original loan terms.

Example how it works
For example, let's say Chester White has 10,000 bushels of wheat in the bin. He takes out a government loan on August 10 at $2.70/bu (his county's loan rate). Now he has until May 31 (the last day of the ninth month after the month in which the loan was approved) to buy back the loan at the posted county price.

As the harvest season continues, Chet keeps track of his daily PCP. For simplicity, let's say the posted price is 50 cents less than what he can get at the elevator that day. Around August 20 the PCP reaches $2.00. He reasons that the market is near bottom and the daily posted price will probably take a jump when switching from Sept. to Dec. futures. He locks in $2.00 as a buy back price for the next 60 days. If he chose to buy back the loan and sell the grain today, he would make 70 cents on the loan and $2.50 for a cash price ($3.20/bu. total).

Historically, the basis does shrink after harvest. Also, the demand and price for wheat usually goes up during row crop harvest, since less wheat is being shipped. Chet watches the market locking in a local price of $2.95 and buys back the loan at $2.00/bu. on Oct. 20. Since he is buying it back at the locked in PCP, the interest is waived.

In this scenario, Chet has made 70 cents/bu. by buying back the loan at the lower price, plus $2.95 cash price, for a total of $3.65/bu. That's an extra 45 cents/bu. compared to buying back the loan and selling the grain sixty days ago. He will probably deduct a storage fee of, let's say, 4 cents/bu. Since he did not have to pay interest on the loan, he has nothing to deduct for opportunity costs. That's an extra $4,100 in his pocket.

If the price and PCP continued to go down, Chet could let the 60-day lock expire. Then he could buy it back any time at the lower posted price. Or he could let the loan expire and keep the $2.70/bu.

His worst case scenario would be getting $2.70/bu.

"The most important thing to remember," Lockhart says, "is that you have to first take out a government loan. In some counties this process can take up to a couple of weeks. After that, you can use the 60-day lock option on all or part of the commodity you have a loan on. In other words, you can take a lock on 20% of the loan at a time. If you did this once a week you could spread the lock prices out over five weeks."

The producer still maintains control of the commodity, so active marketing to lock in prices or basis can enhance the bottom line. However, Lockhart cautions that contracts must still give the producer control of the commodity until the loan is bought back. Your local FSA office should be contacted to make sure the requirements of the government loan are always met.

Wheat Protein Levels - 12% Moisture

Premiums & Discounts
Minneapolis Cash Market

Wheat protein premiums and discounts tend to peak in September-December timeframe, and that can be expected again this year, says George Flaskerud, NDSU extension crops economist.

Protein of Kansas winter wheat is averaging above the average of a year ago, but less than the 10-year average. "For us, it means protein premiums that will probably be a bit less than a year ago," says Flaskerud. "The protein premium at many elevators last year for 15% protein was around 50 cents. This year, it may be in the neighborhood of 35 cents."

Fast facts on the 60-Day PCP Lock

• Available through your county FSA office, the 60-day PCP lock can be used to lock in a PCP for a favorable buy-back price on grain placed under loan.
• The 60-day PCP lock is NOT available on LDPs. And remember, the same bushels put under loan are not eligible for LDPs.
• The PCP 60-day lock is requested on CCC-697.
• It expires no later than 14 days prior to loan maturity.
• Once the lock is in place, it can't be cancelled or changed. You still have the ability to repay the loan anytime during the agreement period, and forfeiture is still an alternative.
• You can make multiple requests for a 60-day lock, but not on the same bushels.
• You'll need to sign a separate form at your FSA office to move grain under loan with the 60-day lock in place. Authorization for delivery within 15 or 30 days is requested on CCC-681-1.
• A backgrounder, "Request To Lock In A Market Loan Repayment Rate (CCC-697) written by Gary Hachfeld and Gary Hayer of the Minnesota Extension Service may be found online: www.extension.umn.edu/specializations/businessmanagement/Ldp697.pdf You will need Adobe Acrobat Reader to view the PDF document. Adobe Acrobat Reader may be downloaded free from the following web address: www.adobe. com/products/acrobat/readermain.html

Michael Lockhart, farm business management instructor, marketing club leader, and Ulen, MN producer says one of the most overlooked marketing tools in times of below-loan prices is the government 60-Day Lock option.