Melvin Brees
Farm Management Specialist
University of Missouri Extension




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September 8, 2000

Market Loan and LDP Changes

As harvest begins, corn and soybean prices remain below CCC loan prices. This means that the market loan and loan deficiency payment (LDP) provisions will again be an important marketing tool--whether used for price support, price insurance or as a speculative tool. Each year changes occur through legislation and administration of the loan provisions, it is important to be aware and understand these changes.

Payment Limitation: Currently the limitation for LDP and marketing loan gains (MLG) is back to $75,000. Last year Congress raised it to $150,000, for one year only (1999 crop). While there is speculation that this will occur again, it hasn't happened yet. Generic Certificates provide one "loophole" to the payment limitation. There are no limits on the use of certificates. If a producer exceeds the payment limit for MLG or LDP, grain can still be placed under the loan at the county loan price. Generic certificates can be purchased at the posted county price (PCP) and the grain immediately redeemed with the certificates--thereby effectively capturing the MLG. The disadvantage to this approach is that the grain must be put under loan and, due to FSA workloads, it may take some time for any certificate redemption or market action can be taken.

"60-Day Lock-in:" It's sometimes referred to as a "free call option." It allows locking in the PCP to redeem a loan for up to 60 days, with no obligation. If prices increase during the 60-day period, the loan can be redeemed at the lower PCP and grain sold on a higher market. If prices don't increase, the 60-day lock-in expires and original loan repayment provisions apply.

Eligible Storage: To be placed under loan, grain must be stored in approved farm storage or a warehouse receipt (commercial storage) must be provided. Temporary storage will not be approved and this could be a problem for those with large production and limited storage. Apparently the LDP can still be collected on any harvested grain, regardless of where it's stored.

LDP: A major change to the LDP provisions allows producers on farms without a Production Flexibility Contract (FPC), which didn't sign up to participate in the current program, to receive an LDP. This is a one-year change only for the 2000 crop! They must complete the proper forms and meet other provisions such as following a conservation plan, maintain beneficial interest, etc.

Beneficial Interest: This is not new, but it is very important that producers haven't made changes that effect it. Beneficial interest essentially means the producer owns the grain and has risk of loss in order to be eligible for the loan or LDP. Most forward cash contracts are worded properly and don't usually cause problems. Seed production and identity preserved grain contracts have caused some problems, but most of these have been corrected. Deferred pricing contracts don't work, because they require giving up title to the grain. If in doubt about a contract, FSA can provide a ruling.

There may still be more changes affecting this year's crop, such as an increase in the payment limitation. Whatever the changes, is important to understand all of the provisions of the market loan program and develop a strategy to use them effectively. It is also important to always check with each local FSA office and be aware of any administrative differences between counties. Make sure that eligibility requirements are met and all of the paperwork is completed and forms are signed. -Melvin

University of Missouri ExtensionDecisive Marketing - September 8, 2000 -- Revised: April 20, 2004