Strategies for Utilizing Commodity Loan and LDP Provisions Roger Selley and Lynn Lutgen Ag Economics Department - UNL Participants in the USDA farm program under the Freedom to Farm Act are eligible for price protection at loan rates established for wheat and feedgrains for each county. Soybean producers are eligible for price protection at the loan rate regardless of whether they have enrolled in the farm program. These producers will be eligible for loan deficiency payments (LDPs) if local prices are below the loan rate following harvest or they may choose to store the grain under loan. The discussion that follows attempts to describe various situations that producers may experience and suggests how they might be managed. Producers should contact their local FSA office for details on the specific procedures for receiving the benefits described below.

Situation 1

Insufficient storage available or the price is not expected to increase sufficiently to cover storage cost. Producer plans to sell (transfer title) at harvest.

Apply for a field direct LDP(Loan Deficiency Payment) before harvest. The LDP will be for the amount the FSA determined local posted county price(PCP) falls below the loan rate. Harvest to maximize the harvested yield times the sale price net of drying plus the LDP. The LDP is intended to supplement the sales price so the producer realizes the loan rate. This will occur if the PCP is equal to the price received which will not always be the case. If the PCP is following the local price, the producer can focus upon determining the tradeoff between harvesting losses and drying costs. In some cases it may be possible to watch the local price and the PCP to take advantage of a PCP that is below the local price. It will likely be more important to harvest fields most at risk of harvest losses in a timely manner.

Example: Local cash price=$1.60, PCP=$1.61 and local county loan rate=$1.88.

$1.88 Loan Rate - 1.61 PCP = $.27 LDP + 1.60 Local Cash = $1.87 Net

Situation 2

Need cash and price not expected to increase sufficiently to cover storage cost.

See strategy under Situation 1.

Situation 3

Need cash but expect price to increase sufficiently to more than cover storage cost.

Secure loan. Store until price net of storage cost at maximum.

Example: Loan rate $1.88, sell when local cash price reaches $2.25 after accruing storage $0.12 per bushel storage and $0.05 per bushel interest on loan.

Following harvest:

$1.88 Loan

Following storage:

-$1.88 Repay Loan +$2.25 Cash Sale - .05 Interest - .15 Storage = $2.05 Net

Note: If the price does not increase as expected and the PCP is less than the loan rate plus interest the loan can be paid off at the PCP.

Situation 4.

Storage available and producer expects the price to rise sufficiently to cover storage cost or it is convenient to store temporarily to facilitate harvest Cash flow not critical.

Historically harvest lows have occurred between August and November. If a producer has storage available, doesn't need the cash and thinks the market will rise to more than cover storage cost, the producer could seek to collect the LDP when it is at a maximum and hold the grain until the price net of storage cost is at its maximum.

An alternative to storage would be to sell the grain and buy futures or a call option. However, if the producer feels the local basis is extremely wide, selling the grain and using the futures market will not realize any gain from basis appreciation (increase in local cash price relative to futures). Instead the grain could be stored realizing it may take 3 or more months for the basis to appreciate. Alternatively a delayed pricing contract could be used.

Using the LDP and selling cash grain in the next tax year will result in deferring most of the income from the grain. Alternatively, a loan could be secured and repaid in the current year at the posted county price (PCP). The grain could then be sold the following year with a basis equal to the PCP with most of the income in the current year and the gain over the PCP as taxable income in the following year.

Authors:
Lynn Lutgen 402-472-3406 Email Agec004@unlvm.unl.edu
Roger Selley 402-762-3535 Email Scrc006@unlvm.unl.edu

9/15/98