Whether it is used or not, everyone loves USDA’s commodity loan program. It is simple, it is quick cash, and in recent years it provided more income opportunity with the Loan Deficiency Payment program. But just like the complexity of its big brother, the ACRE program, USDA’s loan program has new wrinkles as well.

The CCC non-recourse loan program has been around as long as grandpa, who made frequent use of it to finance spring crop input costs at loan rates less than what the bank charged. Convenient, and if the market price stayed low, the government took the grain (non-recourse) and neither the loan nor any interest had to be repaid. But to keep burdensome commodities out of government warehouses, the marketing loan program and the LDP provided cash benefits, and everyone learned about the Posted County Price. In fact, when prices were below the PCP many farmers became adept at working the formula to maximize the LDP. It was a way of making the bottom of the market pay off if the top of the market was too elusive.

But the 2008 Farm Bill has brought some new changes in the loan program according to Iowa State University ag economist Stephen Johnson. His recent newsletter says April 15 was the implementation date for USDA’s new system for determining repayment rates on non-recourse loans. Yes, the days of furiously faxing an LDP request to the FSA office after the market closed have gone the way of grandpa’s “sealed granary.” But never fear, everyone will soon figure out how the program works and begin smiling again.

Loan rates are key to understanding the new program, and there will be county loan rates that vary across the country. Although the national loan rates of $1.95 for corn and $5.00 for soybeans will remain steady, the county loan rates will be announced soon. With crop prices above loan rate levels, few farmers have been interested in the loan program at this time. But if prices venture toward loan levels, understanding the changes will be important.

Loan Deficiency Payments can still be obtained. They will be available at the FSA office when the Posted County Price falls below the Loan Rate. There is nothing new about this calculation.

Alternative Posted County Prices are new to the concept, and the Alternative PCP will be calculated daily to provide, what Johnson calls, “more stable system for determining non-recourse marketing assistance loan repayment rates and PCPs that determine the LDP.” The new method essentially smoothes out the market volatility and reduces the daily variations in Posted County Prices and LDP’s. Johnson’s expectation is that it will “minimize potential forfeitures, accumulation of CCC stocks, CCC storage costs, market impediments and discrepancies in benefits across state and county boundaries.”

The loan repayment rate will be determined by an average of price of the five prior days and an average of prices of the 30 prior days. The 30-day moving average will be calculated from all terminal market prices for the crop, adjusted by the difference between the national loan rate and the county loan rate. The 5-day moving average will be calculated from the terminal prices, adjusted by a county differential and any terminal price adjustments. The terminal prices are typically determined by feed demand, processor demand, or export demand and the two terminals used by a given county will reflect prices driven by consumption. The higher of the two prices will be the Alternative PCP. It will not have much impact, until it moves below the county loan rate.

In the last Farm Bill, a producer with grain under loan could “lock in” a repayment rate for as many as 60 days to minimize the amount required for repayment. Producers without grain in the loan program could maximize their income opportunities by taking the LDP at low levels. However, in the new program, those movements will not be as significant, since the Alternative PCP will be based on moving averages and not the daily close of a volatile market.

Summary:
The loan program remains one of the pillars of the Farm Bill, but changes have been made in the way that repayment rates are calculated, and the way that LDP opportunities are determined. Loan rates will soon be assigned to each county, but the calculation of the Posted County Price, now being called “an alternative PCP,” will be based not on daily closes of the commodity market but on 5 and 30 day moving averages of market prices. The impact will be a smoothing out of the daily changes of LDP’s and loan repayment rates.