Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
February 26, 1999

Market Loan and New Crop Decisions

Last week’s discussion centered around production costs and how new crop prices could affect production and marketing plans. The current market trends suggest that it is possible for 1999 corn and soybean harvest prices to be less than CCC loan prices. The prices and provisions of the marketing loan add another dimension to production and marketing decisions.

The intent of the market loan is to provide producers with a price floor. Briefly stated, the market loan allows producers to take out a commodity loan at the loan price. If the market price (calculated by USDA as the county posted price or PCP) falls below loan price, then the loan can be repaid at the lower price. The LDP (loan deficiency payment) allows side stepping the loan process and simply collecting a payment for the difference between the loan price and lower market price. If the crop is sold when the loan is repaid or the LDP is taken, then these provisions eliminate the risk of lower prices and effectively set a floor at loan price.

Do loan prices favor soybeans? Loan prices vary some from county to county, but the 1998 loan prices are essentially at the national limit of $5.26 for soybeans and $1.89 for corn. The 1999 loan prices haven’t been announced yet, could they be lower? The legislation sets the loan prices between a minimum of 85% of the preceding five-year average market price (excluding the high and low) and the current maximum limits. The Secretary of Agriculture has the authority to adjust loan prices lower, but that has seemed unlikely given the current farm economy. However, if the washout in soybean prices continues, the high cost of the LDP’s will likely attract the attention of Congress.

The 1998 loan prices result in a soybean/corn price ratio of 2.78/1 which seems to heavily favor soybeans (assuming that 2.4 to 2.5/1 are break-even ratios). The problem is, using the loan price ratios assumes that the prices for both crops will be below loan price at harvest. This may not be the case. Current new crop soybean prices are below loan price, but new crop corn bids are higher than loan price. This suggests caution in using loan price alone to make production decisions. Remember, supply and demand along with market price action always tends to correct out-of-balance price relationships.

Using LDP’s as a speculative strategy doesn’t establish a price floor and can increase risk. Many wheat and soybean producers have learned this the hard way. The market loan or LDP only supports price if the cash grain is sold when the loan is repaid or the LDP is set. Trying to enhance price by taking the LDP and then holding onto the crop for higher prices places the producer in a speculative position. If prices continue to fall, as many have learned with wheat or soybeans, they end up with less than loan price. Production and cash-flow plans built around loan price fall apart if speculative losses erase the price floor!

The market loan may help reduce low price risk and influence the decision to plant more soybeans, assuming the 1999 rates are left unchanged. However, new crop corn prices above loan rate, could still favor corn production. The market loan helps, but it still doesn’t make production and marketing decisions easy.-- Melvin


University of Missouri ExtensionDecisive Marketing - February 26, 1999
http://outreach.missouri.edu/agconnection/DCT/DM990226.html -- Revised: April 20, 2004
breesm@missouri.edu