Commodity loan program

Suggested Event. Jan 19, to Jan 21, The opinions of the author are not necessarily those of Farm Futures or Farm Progress. TAGS: Commentary. Hide comments. More information about text formats. Text format Comments Plain text. Web page addresses and e-mail addresses turn into links automatically. Lines and paragraphs break automatically. Leave this field blank. Sponsored Content. Commodity loan programs allow producers of designated crops to receive a loan from the government at a crop-specific loan rate per unit of production by pledging production as loan collateral.

A farmer may obtain a loan for all or part of a new crop at any time following harvest through the following March or the following May, depending on the crop. However, most loan placements occur shortly after harvest, when prices tend to be seasonally low, providing short-term financing to farmers. Before marketing loans were introduced discussed later , to repay the loan, the farmer would return the loan principal plus accrued interest charges.

Alternatively, the farmer could choose to settle the loan at the end of the loan period by keeping the loan proceeds and forfeiting ownership of the loan collateral the crop to the government. If market prices were below the loan rate, the farmer would benefit from settling the loan this way and keeping the higher loan rate. Additionally, if market prices were above the loan rate but below the loan rate plus interest, keeping the loan proceeds and forfeiting the crop would make economic sense because the alternative of repaying the loan plus interest would cost more than the market value of the crop.

Price support to the sector was provided by the acquisition of crops by the government through loan program forfeitures combined with restrictions on CCC sales, essentially removed crops from the marketplace when prices were low. The addition of marketing loan provisions changed the operation of commodity loan programs. Marketing loans were implemented for rice and upland cotton in under the provisions of the Farm Act. Starting in , subsequent legislation made marketing loans available for soybeans and other oilseeds.

Marketing loans for wheat and feed grains were implemented starting with crops, under the GATT trigger provisions of the Omnibus Budget Reconciliation Act of The Farm Act continued marketing loans for all of these crops. With marketing loans, loan placements may occur as described earlier under nonrecourse loan provisions.

However, as implemented, marketing loan provisions allow farmers to repay commodity loans at less than the original loan rate plus interest when market prices are lower. Instead, farmers are provided economic incentives to retain ownership of crops and sell them hence the term "marketing loan" rather than forfeit ownership of crops to the government to settle loans.

Producers can receive marketing loan benefits in two different ways: through the loan program and through direct loan deficiency payments. Under the loan program, farmers place their crop under loan, as described earlier, by pledging and storing some of their production as collateral for the loan, and receiving a per-unit loan rate for the crop. Rather than repaying the full loan, farmers are allowed to repay at a lower loan repayment rate when market prices are below the loan rate plus interest.

Marketing loan repayment rates are based on local, posted county prices PCPs for wheat, feed grains, and soybeans, or the prevailing world market price for rice and upland cotton. When a farmer repays the loan at a lower posted county price or prevailing world market price, the difference between the loan rate and the loan repayment rate the marketing loan gain represents a program benefit to producers.

In addition, any accrued interest on the loan is waived. Alternatively, farmers of crops covered by the loan programs except extra-long staple cotton may choose to receive marketing loan benefits through direct loan deficiency payments LDPs when market prices are lower than commodity loan rates. The LDP option allows the producer to receive the benefits of marketing loans 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 farmers could obtain for crops under loan.

If an LDP is paid on a portion of the crop, that portion cannot subsequently go under loan. The switch in the way that commodity loan programs have been operated, moving from price-supporting programs to marketing loans, results in important differences in effects on commodity markets. With price-supporting loans, market prices are directly supported at the loan rates because the government accumulates stocks through loan forfeitures when market prices are below the loan rate, effectively removing supplies from the marketplace.

Program costs reflect the full loan rate being paid to farmers on a portion of the crop. Costs associated with acquisition and storage of these stocks also add to the agricultural program budget. Production is increased as farmers base planting decisions on program-supported prices equal to the loan rate.

Overall economic efficiency is reduced because of this misallocation of resources. Thus, market demand faces prices that are held higher than they would otherwise be. This not only means that domestic market demands see higher prices, such as higher market prices for feed that increase production costs to livestock producers, but that U.

In subsequent years, the government sells or releases stocks when prices are higher, keeping prices from rising further, but also extending market impacts over a longer time period.

Although this imposes further distortions to the marketplace, effects are in the opposite direction to those that occur in the lower-price years when the government accumulates stocks. As a result, government stock accumulation in low price years and stock release in higher price years may contribute to some reduction in multi-year price variability.

Also, while effects of price supporting loan programs may extend over a longer period of years, multi-year cumulative impacts on total supply may be largely offsetting. In contrast, program benefits under marketing loans are provided through an income transfer rather than through a price support.

Per-unit revenues to producers are supported but market prices are not. Government budgetary costs are largely through direct payments to farmers and costs of net loan activity including marketing loan gains , but there are not significant governmental stockholding costs.

In contrast to price-supporting loans with costs reflecting the full loan rate paid on part of the crop, marketing loan costs reflect a portion of per-unit revenues the gap between the loan rate and the market price potentially paid on the full production of the crop. As for price-supporting loans, production is increased as farmers base planting decisions on net returns that reflect program benefits. However, for marketing loans, net returns reflect part of the revenues coming from the marketplace and part from the government in the form of the marketing loan benefit either a marketing loan gain or a loan deficiency payment.

Again, economic efficiency is lowered because of the resulting misallocation of land and other resources. The Administrator will be in default of an Administrator Loan if one or more of the events occurs:. The Lender or the Minister shall immediately notify the other of any default to which they become aware. In the event that the Producer is unable to repay the Producer Loan, the Administrator:.

The maximum amount payable under the Guarantee will not exceed the aggregate of all Producer Loans eligible to be covered by the Guarantee for those Producer Loans and the applicable Interest on those Producer Loans. The Minister will not make any payments on the Guarantee under the following circumstances:.

If the Minister pays on the Guarantee and the Administrator recovers any money in respect of the Producer Loan afterwards, the Administrator will pay to the Minister and amount equal to the difference of:. Any Lender that issues an Administrator Loan to the Administrator under the Program will retain all records relating to that Administrator Loan for a period of at least seven 7 years from the date in which the Administrator Loan was issued.

The Administrator will retain all records relating to any Administrator Loans and Producer Loans under the Program for a period of at least seven 7 years from the date in which the Administrator Loan or the Producer Loan as the case may be was issued. The Administrator will provide the Minister with an annual report about the Program.

The contents of the annual report and the date in which the annual report is to be submitted to the Minister will be set out under the Administrative Agreement. The Administrator will provide the Minister with any other reports that are set out in the Administrative Agreement in accordance with what is set out under the Administrative Agreement.

Where an inspection takes place, the Lender, Administrator or Producer as the case may be will provide reasonable assistance during the inspection. This includes allowing an inspector access to any person, place or thing required for inspection purposes upon request.

Any Person that participates in the Program as a Lender, Administrator or Producer is subject to audit that may be conducted in relation to the Program for the enforcement of the rules, terms and conditions of the program. Where an audit takes place, the Lender, Administrator or Producer as the case may be will provide reasonable assistance during the audit.

This includes allowing an auditor access to any person, place or thing required for auditing purposes. Any Person that participates in the Program as a Lender, Administrator or Producer as the case may be will provide all requested information within ten 10 Business Days of the request being made by the Minister or the Administrator, including their respective delegates, unless more time has been provided in the request.

The right of set-off is in addition to any other legal remedies the Crown may have in law, equity or otherwise to recover a debt that is owed to the Crown. The Crown may charge interest on any debt that it is owed under this Program at the applicable interest rate that is being charged by the Crown for debts owing to the Crown. Accessing this message means you do not have a JavaScript enabled browser.

If you cannot enable JavaScript in your browser and would like to know the last modified date for this page, please contact the webmaster at - internet. Print Share. Definitions For the purposes of these program guidelines the terms below will have the following meanings: " Administrative Agreement " means the agreement between the Minister and the Administrator setting out how the Administrator will administer the Program. Any information provided by the Ministry regarding any money owing to the Crown, and.

Termination The Minister may — without liability, cost or penalty to the Crown — terminate this program at any time if the Minister determines that the program should not continue. The termination of the Program will not affect any obligations that:.