OMAHA (DTN) -- Farmers, bankers and others across wheat country are having to get reacquainted with marketing loan gains and loan deficiency payments, also known as LDPs.
It's been a decade or so since LDPs were part of the annual marketing strategy for most major grain farmers, but loan deficiency payments have returned for wheat and might even be on the cusp of returning for corn in some parts of the country as well.
For the sake of farmers out there, hopefully the market situation with any of these major crops doesn't reach the point where producers are keeping an eye on market moves to lock in the largest LDP.
And while it has been some time since LDPs were needed, things have changed over the past decade. One key change, for instance, is that payment limits for commodity programs are tighter -- $125,000 per person -- and any marketing loan gain, including an LDP, applies to the cap.
LOAN RATES AND POSTED COUNTY PRICES
The farm bill sets national loan rates for commodities that are then adjusted, both higher and lower, by county based on factors such as transportation costs. The LDP rate is the difference between the loan rate and the lower of either the 30-day Posted County Price (PCP), or the alternative PCP.
The terms for locking in an LDP have changed over the past decade because the Posted County Price is now a five-day moving average. That gives farmers more leeway in terms of choosing to lock in an LDP rather than having to respond to an overnight move in the market. You have more time to respond to a price move to claim an LDP.
Wayne Myers, director of farm program services for KCoe Isom, said the issues surrounding how to use LDPs and capture marketing-loan gains snuck up on people in July as wheat prices dipped below the national loan rate of $2.94 a bushel and local loan rates adjusted for basis. Over the past week, Myers said he's been giving presentations in Colorado and had phone calls with bankers who are getting up to speed.
Given that it's been 10 or 11 years since LDPs were prevalent, Brad Lubben, an ag Extension specialist at the University of Nebraska, said a lot of producers may have forgotten about the mechanics of the program. He noted in an update on LDPs that the loan rate was way below the market price "and largely out of mind" when Congress passed the 2014 farm bill "but it is now, unfortunately, very relevant given current price levels and projections going forward," Lubben said.
On Wednesday, major wheat-producing counties in Kansas, Colorado and Nebraska counties were posting effective LDPs rates of 12 cents a bushel on hard red winter wheat, down a penny from Monday's rate.
LDPs haven't been part of the marketing strategy for corn farmers since 2005. DTN's National Corn Index is $2.95 a bushel on Wednesday, still $1 above the national loan rate for corn. Still, bids for corn in at least one South Dakota county are as low as for $2.15-$2.17 a bushel right now. Corn bids at a few other grain elevators in the Dakotas, parts of Nebraska and Kansas are under $2.50 as well.
"We still have a ways to go, even in those counties with bids that are very low," Lubben said of lower cash corn bids. "Certainly, there is risk of going there that we didn't expect."
Local loan rates and Posted County Prices can be found here: http://www.fsa.usda.gov/…
A key element for the LDP is ensuring you still have beneficial interest in your commodity when you go to the local Farm Service Agency office to seek an LDP payment. A farmer has to still own the crop and then consider whether to take a loan, an LDP or use a commodity certificate.
A farmer taking a crop directly from field to the grain elevator to sell needs to ensure he or she has filed the paperwork with the Farm Service Agency to take the LDP that day. Page 1 of USDA form CCC 633EZ must be filed with the local FSA office before a farmer gives up that beneficial interest in the crop. The 633EZ can be filled out any time in advance on a commodity to declare a producer's intent to collect an LDP. That protects a producer when he or she is delivering crops directly to the elevator. Producers then can fill out Page 2 or 3 of the 633EZ when requesting the LDP payment.
The $125,000 payment cap includes marketing loan gains such as LDPs, as well as Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) payments. The kicker, though, is farmers won't know until sometime in 2017 what potential ARC-County or PLC payments are going to be like.
Farmers who have had ARC-County or PLC payments approaching or hitting the $125,000 limit might want to consider using USDA commodity certificates for marketing loans rather than simply taking the LDP. The reason to consider commodity certificates over simply taking the LDP is that gains on commodity certificates are not subject to farm-program payment caps.
Commodity certificates have been used far more often for crops such as cotton and rice, but certificates could become critical to help other commodity farmers -- such as wheat producers -- protect the size of a potential ARC or PLC payment at the end of the marketing year.
"Protecting your exposure against payment limits may become important," Lubben said.
Commodity certificates are bought at the FSA office and can be used to cover a marketing loan later in the year. Yet, the certificates can also be used immediately after they are bought to capture the same payment as an LDP.
For example, a wheat farmer in Reno County, Kansas, could buy a commodity certificate for 100,000 bushels at FSA for the Posted County Price of $3.11 a bushel, put 100,000 bushels under a marketing loan at the office at a $3.23 loan rate, then turn around and redeem the certificate to collect that 12-cent spread between the county price and loan rate. The farmer collects $12,000 on the gain, which is the same he or she would get by just asking for the LDP. But the exchange of the commodity certificate for the marketing loan means the payment doesn't count against any potential ARC-County or PLC payment at the end of the marketing year.
Yet, to use a commodity certificate in this way, a farmer likely needs to work with their local lender to ensure a check paid for a certificate doesn't come into the bank for payment before the farmer gets paid on the crop and collects payment from FSA.
"Your banker is going to have to work with you because you may need a loan to pay for the certificates," Myers said. "You pick up the differential, but you aren't going to have the cash until you sell the crop." He added, "There may be a short period of time when you are needing cash flow to make that work. Then, of course, continuing to be able to hang on to the grain to be able to market it."
Myers said the lack of understanding or use of commodity certificates also may cause some confusion at local FSA offices, especially those that have seen significant turnover since the last time certificates were used locally.
"There are probably going to be a lot of county offices where producers do that where the FSA is going to have to call the state office and ask if they can do that," Myers said.
For more information, see an FSA Fact Sheet on marketing loans and loan deficiency payments here: http://www.fsa.usda.gov/…
Chris Clayton can be reached at Chris.Clayton@dtn.com
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