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Dealing with the limit

Agriculture.com Staff 01/25/2006 @ 9:38am

Excellent corn yields in many areas, along with low prices, resulted in significant levels of loan deficiency payments (LDPs) being available to farm operators last year.

Due to potentially large LDP payments per acre for corn, a large number of farm operators could reach the $75,000 payment limit for LDPs and marketing loan gains (MLGs).

If producers choose to put the corn under a Commodity Credit Corporation (CCC) marketing loan, rather than taking the LDP at harvest, the MLG is also subject to the $75,000 payment limit. Every bushel of corn grown in 2005 is eligible to receive either an LDP or to be put under CCC loan, but not both.

LDPs and gains add up fast

The calculation for both the LDP and MLG is the difference between the county CCC loan rate and the posted county price (PCP) on any given day. For example, if the county loan rate is $1.83 per bushel and the PCP on November 4 was $1.35 per bushel, the LDP that day was 48 cents per bushel.

Or a producer using a 60-day PCP lock-in on November 4 could release the corn under CCC loan at $1.35 per bushel any day until January 4, 2006, and get a 48 cent -per-bushel MLG. Either way counts toward the $75,000 payment limit.

If this producer averaged 200 bushels per acre, the LDP or MLG would be $96 per 2005 corn acre. He or she would reach the $75,000 payment limit with 781 corn acres. This means that many midsize corn and soybean producers are reaching the $75,000 LDP or MLG payment limit.

Here are ways that some producers have addressed payment-limit issues:

Set up separate payment limits for each active member of a farm business (spouse, sons, daughters, etc.). Remember, each person must meet the criteria for being "actively engaged in farming" as established by USDA, in order to be eligible for a separate payment limit. These arrangements should be made at county Farm Service Agency (FSA) offices at the beginning of a crop year and not after harvest is completed.

Use the triple entity rule. This allows a producer to be actively engaged in up to three different farm businesses for payment-limit purposes. The rule allows you to have one full $75,000 payment limit and up to two half payment limits, for a total maximum payment limit of $150,000 per producer. Again, arrangements should be established at county FSA offices at the beginning of a crop year.

Use the commodity certificate exchange to release CCC grain that is under loan, instead of taking an LDP or earning a MLG.

Gains achieved by using commodity certificates to redeem CCC loans are not counted toward the $75,000 payment limit.

Producers should contact their county FSA office for specific procedures on utilizing the commodity certificate exchange to release grain that is under a CCC loan.

Due to the higher incidence of producers reaching the $75,000 payment limit, many farm operators are using commodity certificates to release CCC grain that is under loan, instead of taking an LDP on the grain or using PCPs to release grain that is under CCC loan.

How certificates work

Here are the details on the commodity certificate exchange.

Grain is placed under a nonrecourse CCC loan at the county FSA office and released with commodity certificates purchased at the PCP on a given day. They are used in an exchange to release the bushels of grain under CCC loan.

In order to use the commodity certificate exchange, the quantity of grain must have been placed under a CCC nonrecourse loan, and the commodity certificates that are purchased must be immediately applied to repay the loan. (This also means you can’t use the 60-day PCP lock-in.)

Depending on the transaction dates at the county FSA office for the CCC loan and the commodity certificate exchange, the gain per bushel from the exchange may or may not be the same as taking an LDP on a given day.

Any gains from using a commodity certificate exchange aren't counted toward the $75,000 payment limit, and there's no limit on the number of bushels under loan that can be released with an exchange.

Producers must maintain beneficial interest in the grain to use the commodity certificate exchange on those bushels of grain.

You can use the commodity certificate exchange even if you haven’t hit the $75,000 payment limit.

Contact your county FSA office for more information.

Kent Thiesse is a loan officer at MinnStar Bank in Lake Crystal, Minnesota. E-mail him at Kent.Thiesse@minnstarbank.com.

Excellent corn yields in many areas, along with low prices, resulted in significant levels of loan deficiency payments (LDPs) being available to farm operators last year.

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