Farm and Commodity Policy: Program Provisions: Marketing Assistance Loans and Loan Deficiency Payments

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USDA's Farm Service Agency (FSA) administers commodity loan programs with marketing loan provisions for producers of wheat, corn, grain sorghum, barley, oats, upland cotton, extra-long staple (ELS) cotton, long- and medium-grain rice, soybeans, other oilseeds, peanuts, wool, mohair, honey, dry peas, lentils, and small and large chickpeas through the Commodity Credit Corporation (CCC).

Program Overview

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 and sell the commodity several months later. National loan rates are fixed in legislation.

Commodity loans may be settled in three ways:

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

National loan rates for crop year (CY) 2008 are unchanged from CYs 2004-07. However, national rates change for several commodities in CYs 2009-12. In addition, marketing loan rates are reduced by 30 percent for producers electing to enroll in the Average Crop Revenue Election (ACRE) Program, which begins with the 2009 crop.

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 county prices for wheat, feed grains, and oilseeds or on the prevailing world market prices for rice and upland cotton. Loan program benefits can also be taken directly as loan deficiency payments (LDP), a cash payment equal to the difference between the loan rate and the loan repayment.

Loan Repayment Rates

The Secretary of Agriculture shall determine loan repayment rates for loan commodities—other than long-grain rice, medium-grain rice, upland cotton, ELS cotton, and confectionery and each kind of sunflower seed (other than oil sunflower seed)—at:

• A rate based on average market prices for the loan commodity during the preceding 30 days; or
• A rate that minimizes the accumulation of stocks of the commodity, minimizes storage costs, and allows the commodity produced in the United States to be marketed freely and competitively, both domestically and internationally.

Loan repayment rates should minimize discrepancies in marketing loan benefits across State boundaries and across county boundaries.

The Secretary is required to establish a single county loan rate for each kind of other oilseed in each county, based on the national rate.

When a farmer repays a loan at a lower loan repayment rate, 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.

Special World Price Considerations for Upland Cotton and Rice

Marketing loan repayment rates for rice and upland cotton are based on prevailing world market prices. The world market price for rice is determined by a formula adjusted for U.S. quality and location. A quality adjustment for upland cotton is made based on cotton of comparable quality delivered to a definable and significant international market.

Loan Deficiency Payments

Instead of taking out a commodity loan, eligible farmers may choose to receive marketing loan benefits through LDPs 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 loan repayment rate 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 for another LDP.

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 (May 2001), 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.

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 other years when prices rise high enough to eliminate marketing loan benefits.

The 2008 Farm Act increases loan rates for wheat and small grains, while holding loan rates for most other commodities at their prior levels. At the margin, these loan rate changes could shift plantings toward wheat and small grains if prices for those commodities are low.

For More Information...

• Sector Analyses section of the Recommended Readings