ERS Analysis:
Marketing Assistance Loans and Loan Deficiency Payments (LDPs)

2002 Farm Bill Home Title I: Commodities Title II: Conservation Title III: Trade Title IV: Nutrition Title V: Credit Title VI: Rural Development Title VII: Research Title VIII: Forestry Title IX: Energy Title X: Miscellaneous   Resources Details & analysis Background publications Farm policy glossary Farm bill summary Download the farm bill Related USDA Agencies Farm Service Agency Foreign Agricultural Service

Key Changes

Marketing loan provisions are added for peanuts, wool, mohair, and honey. Loan rates for wheat, feed grains, and upland cotton are increased from previously legislated maximums. Loan rates for soybeans and other oilseeds are reduced from previously legislated maximums. Loan rates are fixed in legislation.

Summary of Provisions

The Farm Service Agency (FSA) administers commodity loan programs with marketing loan provisions for wheat, rice, corn, grain sorghum, barley, oats, upland cotton, soybeans, other oilseeds, peanuts, mohair, wool, honey, small chickpeas, lentils, and dry peas through the Commodity Credit Corporation (CCC). Commodity loan programs allow producers of designated crops to receive a loan from the Government at a commodity-specific loan rate per unit of production by pledging production as loan collateral. After harvest, a farmer may obtain a loan for all or part of the new commodity production.

Commodity loans may be repaid in three ways:

• At the loan rate plus interest costs (CCC interest cost of borrowing from the U.S. Treasury plus 1 percentage point),
• By forfeiting the pledged crop to the CCC at loan maturity, or
• At the alternative loan repayment rate.

When market prices are below the loan rate, farmers are allowed to repay the commodity loans at a lower loan repayment rate. Marketing loan repayment rates are based on local, posted county prices (PCP) for wheat, feed grains, and oilseeds, or on the prevailing world market prices for rice and upland cotton. PCPs are calculated (and posted) by the Government each day the Federal Government is open, except for other oilseeds, which are calculated weekly. Prevailing world market prices for rice and upland cotton are also calculated on a weekly basis. When a farmer repays the loan at a lower PCP or prevailing world market price, the difference between the loan rate and the loan repayment rate, called a marketing loan gain, represents a program benefit to producers. In addition, any accrued interest on the loan is waived. When a marketing loan gain is received on a given collateralized quantity, that quantity is not eligible for further loan benefits.

Alternatively, eligible farmers may choose to receive marketing loan benefits through direct loan deficiency payments (LDP) when market prices are lower than commodity loan rates. The LDP option allows the producer to receive the benefits of the marketing loan program without having to take out and subsequently repay a commodity loan. The LDP rate is the amount by which the loan rate exceeds the posted county price or prevailing world market price and thus is equivalent to the marketing loan gain that could alternatively be obtained for crops under loan. When an LDP is paid on a portion of the crop, that portion cannot subsequently be used as collateral for another marketing loan or LDP.

Producers who elect to use acreage planted to wheat, barley, oats, or triticale for the grazing of livestock are eligible to receive "graze-out" payments in lieu of loan deficiency payments. The payment quantity is determined by multiplying the acreage grazed times the payment yield for direct payments for that covered commodity on the farm. LDPs for triticale use the grazing payment rate and payment yield for wheat on the farm. If there is no wheat yield on the farm, the payment will be constructed based on yields on comparable wheat farms.

The payment limit on marketing loan gains and loan deficiency payments is $75,000 per person, per crop year. The three-entity rule is retained. Under the three-entity rule, an individual can receive a full payment directly and up to a half payment from each of two additional entities. Producers with adjusted gross income over $2.5 million, averaged over 3 years, are not eligible for payments, unless more than 75 percent of adjusted gross income is from agriculture.

Commodity certificates can be purchased at the posted county price for wheat, feed grains, and oilseeds or at the effective adjusted world price for rice or upland cotton. The certificates are available for producers to use immediately in acquiring crop collateral pledged to CCC for a commodity loan. These provisions enable producers who are facing payment limits an opportunity to benefit from the lower loan repayment rates.

Economic Implications

When commodity prices are below commodity loan rates, loan benefits augment market receipts. The ERS report Analysis of the U.S. Commodity Loan Program with Marketing Loan Provisions shows that impacts of marketing loans vary year by year, depending on the absolute and relative magnitudes of expected crop-specific marketing loan benefits. When prices are low, marketing loans can create incentives to produce specific crops. With marketing loan benefits ranging from around $5 billion to over $8 billion in 1999-2001, total acreage planted to the eight major field crops was estimated to have increased by 2-4 million acres annually as a result.

Cross-commodity effects of supply response to relative returns (including marketing loan benefits), however, result in acreage shifts among competing crops, which can lead to reductions in plantings of some crops in some years. Most impacts occur in years when there are marketing loan benefits, with little effect in subsequent years when prices rise high enough to eliminate marketing loan benefits.

The 2002 Farm Act increases loan rates for wheat and feed grains, while lowering the loan rates for soybeans and other oilseeds from their caps. At the margin, these loan rate changes would shift plantings toward wheat and feed grains when commodity prices are low, compared with leaving loan rates at their caps under the 1996 Farm Act.