Agricultural Marketing Assistance Loans and Loan Deficiency Payments Page: 4 of 6
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This alternative repayment provision accomplishes several important objectives. It
leaves the commodities in the hands of the farmers, and they (rather than the CCC) make
the future marketing decisions. All of the costs and complications of government storage
and disposal of inventories are avoided. Also, farmers have the opportunity to later sell
the commodities at prices higher than their loan repayment rates. The difference between
the loan rate and the lower repayment rate is called the marketing loan gain for the farmer.
The gain is considered a government payment and is taxable farm income.
Loan Deficiency Payment Provisions
When market prices fall below the commodity loan rates, the opportunity to obtain
marketing loan gains might encourage nearly all farmers to obtain loans, even those who
would not otherwise do so. To avoid this, farmers may choose to receive loan deficiency
payments (LDPs) in lieu of securing and repaying the marketing assistance loans. The loan
deficiency payment is the calculated difference between the loan rate and the alternative
repayment rate (the posted county price or adjusted world price). So, when market prices
fall below loan rates, farmers who agree to forego loans have the same opportunity to
benefit as do farmers with loans. For 1998 crops, spot market prices fell low enough that
LDPs were made to producers of most eligible commodities. By early September 2000,
the CCC had paid $2.7 billion for 1998 crop LDPs and $6.1 billion for 1999 crop LDPs.
Policy Issues
Low prices have transformed a program devised as short term marketing assistance
into also a major income support program. This transformation has revealed several
administrative design difficulties and provoked several controversial policy questions.
Payment Limitations. Together, the combination of all marketing loan gains and
LDPs, is called the marketing loan benefit and is subject to an annual per-person payment
limit of $75,000. Low prices have put many large and even mid-sized farms up against the
limit. When farmers reach the payment limit they can put all of the remaining crop under
loan and forfeit the stored commodities to settle the loan. Receiving forfeited commodities
is just as expensive for the CCC as making LDPs. Congress addressed the problem by
doubling the payment limit to $150,000 for 1999 crops (P.L. 106-78). Also, in February
2000, the Secretary of Agriculture implemented a commodity certificate program
(authorized by P.L. 106-78, Section 812) to discourage forfeiture of loan collateral
commodities. Farmers may purchase certificates at the posted county price up to the
quantity of grain or cotton under loan, and then immediately trade the certificates to
recover commodities under loan. While purported to discourage commodity forfeitures,
certificates effectively serve to circumvent the payment limitation.
While certificates appear to eliminate the constraints created by payment limitations,
there are problems. First, certificates require that commodities be put under loan. To put
commodities under loan they must be held in storage. This necessitates storage facilities
with adequate capacity. There is significantly more paperwork and time involved in
processing a commodity loan than an LDP. The paperwork is a burden on the limited
county Farm Service Agency staff, and (while commodities are in storage) storage
expenses accrue to the farmer. In contrast, LDPs can be exercised as soon as the crop is
harvested and with little paperwork, thereby facilitating immediate sale and shipment.
Another problem is that loan rates for high moisture corn, corn silage, and low quality
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Womach, Jasper. Agricultural Marketing Assistance Loans and Loan Deficiency Payments, report, September 15, 2000; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc816033/m1/4/: accessed April 24, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.