Be Careful with LDPs

Published on: 14:58PM Aug 04, 2016

~~Several wheat growing areas of the US are now seeing the option to receive Loan Deficiency Payments (LDP) in lieu of doing a loan with the Commodity Credit Corporation.  These payments represent the spread between the current loan rate per bushel and the lower of the 30 day Posted County Price (PCP) or the alternative PCP.  In the hard wheat region of Kansas, Colorado and Nebraska, you are now seeing LDPs in the 10-25 cent range.  Many of the wheat farmers are taking advantage of these payments to increase current cash flow.

However, LDPs are subject to the overall $125,000 payment limit which includes PLC and ARC payments.  If the wheat farmer had signed up for PLC and takes advantage of LDPs, this may actually result in no net additional revenue to the farmer for the 2016 crop.  Currently USDA is estimating the projected wheat PLC per bushel payment of $1.70.  This is the difference between the reference price of $5.50 and the final projected MYA price of $3.80.  I am not sure if it will get quite this low, but let's assume they are correct.  Let's look at some examples on how LDPs can affect a farmer's cash flow.

Farmer Stevens grows wheat in Western Kansas.  He has 5,000 base acres of wheat with a PLC yield of 40 bushels per acre.  Using the USDA MYA prices, we arrive at estimated 2016 PLC payments on his wheat acres of $289,000 (5,000 acres times 85% times 40 bpa times $1.70).  His wife is set up with local FSA office so they are entitled to $250,000 of total payments.  During 2016, Farmer Stevens harvested 60 bushels per acre or 300,000 bushels and collected an average of 12 cents per bushel in LDPs or $36,000.  Since they are limited to $250,000 in payments, the actual amount of PLC that they can collect for the 2016 crop is only $214,000 ($250,000 minus $36,000).  As you can see, the LDPs reduced the amount of PLC payments they could get in October of 2017 (remember there is a one year lag in payments).

Now, let's assume that the actual PLC price is only $1.25 for the 2016 crop year.  In this case, Farmer Stevens will receive PLC payments of $212,500.  This amount plus $36,000 of LDPs equals $248,500.  This is under his limit and Farmer Stevens will  collect all PLC and LDP payments.

Therefore, farmers should run their PLC calculations for the 2016 to determine if they will exceed their payment limitations.  If they are likely to exceed the payment limitations from PLC payments, getting any LDPs this year will ultimately result in lower payments next year.  The payment cap creates a zero sum scenario for these farmers.  The more they take in LDPs the less they get in PLC.

One available option to farmers in this situation is to use a Commodity Certificate Exchange to essentially receive the same payment as a LDP but not have it count against your payment cap.  The FSA allows a farmer to purchase a commodity certificate for the current PCP price and use it as payment on their loan.  However, this requires the farmer to pay cash for the certificate and they will not receive cash to pay this loan until they sell the crop so a good lender may be needed to help with cash flow.

As an example, a farmer in Adams County, Colorado could purchase a commodity certificate for 100,000 bushels of wheat at $2.97 (a $297,000 investment), put 100,000 bushels under a marketing loan at $3.08 per bushel (receive $308,000) and then use the certificate to pay off the loan.  The difference of $11,000 is the gain the farmer gets to keep.  This gain is exactly equal to the amount of LDP that he could have collected, however, it is not subject to the $125,000 payment limitation.  In our first example, Farmer Stevens could collect $250,000 of PLC payments plus $36,000 of certificate gains for total cash flows of $286,000.  Using LDPs would have limited total cash flow to $250,000.

The bottom line is that wheat farmers will larger number of acres need to carefully calculate their estimated 2016 PLC payments and if they will likely be over the cap, skip getting LDPs.

For corn growers, if cash prices in the extreme corners of the corn belt get under $1.95 (the national loan rate), the same analysis will apply to them.