When times are tough, there’s help at the local FSA
On some commodities, we’ve hit some pretty interesting times. This is especially true with wheat.
Sometimes we just have to be patient for something bad to happen to put prices up. In the meantime, I want to talk about two programs that are essential to a farmer’s cash flow through a tough time like this, if they don’t have the grain sold in advance.
1) Commodity loans
We’ve talked about commodity loans, I don’t know, maybe 1,000 times? There’s a reason why, though.
You can find the full information about commodity loans here, but basically if you’re going to put grain in the bin and you have any sort of opportunity to prepay for stuff, taking a commodity loan may be just what the doctor ordered.
A commodity loan is for nine months. The interest rates are 1% above the rate borrowed by the U.S. treasury. Last year I borrowed the grain I did a commodity loan on at 1.25%, which is very very good.
The only downside about commodity loans is that the government always seems to find a way to run out of money. So lending money to farmers is not as important as other things. The FSA could run out of money, technically, and run out of credit.
But the downside doesn’t outweigh benefit in this case. Take advantage of commodity loans.
The rates are different depending on where you’re at, as you can see. It’s not a lot compared to what you’ll get at market, but at least you’ll have some cash at low interest to get you through. And if you can use it to prepay and get 10% discounts ahead of time, you’ll be ahead in the long run.
2) Loan deficiency payments
This is something that hasn’t happened in farming in a long time.
You can find a link to LDP rates, and how they’re calculated, here. But here’s how it works:
LDP rates are determined by the amount the applicable commodity loan rate exceeds the determined value, which is the lesser of either:
• 30-calendar day Posted County Price (PCP)
• Alternative PCP, which is a 5-calendar day rolling average.
In my area, the alternative PCP was $2.87 when I took this screenshot, and the loan rate was $3.03 for hard red winter wheat, so there was a $0.16 LDP.
Basically, for the grain you have, you can either take a loan on it (a commodity loan, which we just talked about) or you can take an LDP payment. At the point of taking an LDP payment, you can’t take a commodity loan, but the government will give you the difference between that cash price and loan rate, which for the wheat example was $0.16. It’ll give you that price based on how many bushels you want to do it on.
There are some mitigating circumstances: you have to have control of the grain, for example.
LDP payments are something you can do for things like wheat. I hope you won’t need it for corn: that would meant the cash price is less that $1.83, which I don’t see happening. But for the folks who have wheat, this is a great way to get money out of it without selling it. Or you could take the LDP and then sell it, getting another $0.16.
Listen to the full podcast.
More on PCP
There’s the 30-day Posted County Price (PCP), then there’s an alternative PCP, which is a five-calendar-day average instead of 30. So if we have a huge drop in commodity prices, that alternative PCP will pick that up.
In the wheat example, the alternative PCP was $2.87. The 30-day was $4.24. Obviously, the moving average is going to be a lot flatter because it’s a 30-day average. There’s a huge difference between the two.
PCP is different in every county, again, so go to your local FSA to figure out. There’s a lot to it, but it’s worth doing your homework on. And it’s a part of farming if you want to take advantage of opportunities.
That’s it! I think I’ve made this as confusing as possible.
But really, it’s actually simpler than it looks. You’ve got to pick one, a commodity loan or an LDP payment, and at that point it’s up to you. It’s different for everybody, which is why having a custom approach to this grain marketing is so important.
Speaking of grain marketing advisory, check us out. We’ve got your back!