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Understanding the 60-day lock-in of the PCP

Agriculture.com Staff 08/16/2006 @ 9:33am

The recent decline in local cash prices for corn and soybeans reflecting the Posted County Price (PCP) has created a new opportunity for those with 2005 crops still under loan with the USDA Farm Service Agency (FSA). That loan can be repaid at the lower PCP and the interest on the loan forgiven.

However, failure to understand the implications for using the 60-day lock-in of the PCP could be troublesome. Questions regarding repayment of marketing loans and the ability to waive interest are near an everyday occurrence in FSA offices across Central Iowa.

Failure for producers to understand the use of the 60-day lock-in is the underlying problem. Example: A producer is still holding old crop soybeans unpriced in mid-August. The cash price reflecting the PCP drops below the county loan rate, thus creating a marketing loan gain and the ability to waive interest on that 9-month non-recourse loan. However, the soybeans are stored on-farm and the producer needs that storage space before the 60-day lock-in period might expire. If the producer decides to take the 60-day lock-in of the PCP on that loan, two things could happen:

The PCP goes down, so the producer tries to time the lowest PCP and thus the cheapest loan payoff. However, the lock-in expires on the 60th day or within 14 days of the loan maturity, which ever comes first. Remember, you can’t move the beans without FSA authorization (Form 681), so you could be in danger of waiting into early harvest when you need that storage space. Before you take the 60-day lock-in, think about when you need that storage space.

The cash price and thus the PCP goes up, thus taking away the marketing loan gain, and the ability to waive interest on the loan. You can sell the soybeans, but now you’ve got to get FSA authorization and the cash soybeans priced. Now the PCP is above the loan rate, so you may end up paying back the loan plus interest.

There are several recommended solutions:

Work with your local FSA office to understand the implications of using the 60-day lock-in provision and the timing associated with this strategy, especially when used in the late summer months,

Work with your lender on obtaining a short-term loan that will allow you to payoff the marketing loan at the PCP when below the county loan rate and thus waiving interest accrued;

Create a crop marketing plan that minimizes the risk of holding large volumes of old crop into late summer months when seasonal cash prices typically trend lower.

It's important to note the importance of when those bushels were taken under loan. For corn or soybeans taken under loan in November, that loan expires on August 31st, thus for current situation, the 14-day period before the loan expires takes precedence prior to the 60-day lock-in period. Please contact your local FSA office regarding questions concerning marketing loans, marketing authorizations as well as 60-day lock-ins of the PCP.

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