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Corn+Soybean Digest

Marketing Loan Program Questions And Answers

Q: Why aren't all marketing assistance loans made to producers of the same commodity, e.g. soybeans, corn and wheat, made at the same rate per bushel?

A: Except for the first few years of the Commodity Credit Corporation's (CCC) existence when all loans for a commodity were made at the same rate regardless of the county where the commodity was produced or stored, CCC has made wheat, feed grain (corn, grain sorghum, oats and barley) and oilseed loans to producers by taking into account the geographic location of where the commodity was either produced or stored. CCC established loan rates on a county- by-county basis taking into account the location of the county with respect to normal commercial markets, usually using terminal markets that the private sector uses in pricing commodities. Thus, the CCC loan rates have, to varying degrees over the years, been reflective of market prices.

Q: How are county loan rates established once the national loan rates are set by Congress?

A: Historically, Congress has authorized CCC to adjust loan rates on the basis of various factors such as location and quality as long as the adjusted county loan rates average back to the national average rate, taking production levels into consideration.

Starting with the 1986 crop year, CCC began to develop a sophisticated pricing system that utilized data obtained in the course of CCC's commodity purchasing and selling operations to carry out Commodity Certificate exchanges. For these exchanges, CCC issued commodity certificates for a dollar amount, and these certificates could be exchanged for CCC-owned inventory at locations throughout the United States.

In order to ensure that persons who submitted certificates for commodities in various locations across the country received the same value of commodity, regardless of location, CCC established "Posted County Prices (PCP)" for wheat, feed grains and oilseeds. These PCP's generally were calculated using prices collected from those terminal markets that influenced the prices in the specific county. Thus, a person who submitted a $1,000 certificate (face value) for a commodity in a county where the CCC-determined value (PCP) of the commodity was $2.00 per bushel received 500 bushels of the commodity from CCC; a person who submitted a $1,000 certificate for the same type of CCC- owned commodity more in-line with the terminal market where the PCP was $2.50 per bushel received only 400 bushels of the commodity.

Over a five-year period, this elaborate certificate/commodity valuation system was used on a daily basis to establish in excess of 10,000 local prices to exchange certificates worth in excess of $25 billion. This same pricing system is currently used to calculate marketing assistance loan repayments and Loan Deficiency Payments (LDP).

In 1987, CCC used an average of the 1986 PCP's for each commodity to establish the 1987 county loan rates. Adjustments were made on a national basis to take into account the volume of the commodity produced in the county as a percentage of the national production of the commodity. Accordingly, counties with higher PCP's in 1986 generally received higher loan rates in 1987.

Q: When comparing the 2001 actual and 2002 proposed county loan rates, why are there such wide variations in the loan rates for wheat and feed grains, while the proposed changes for soybeans vary only up to $.03 per bushel, after taking into account the $0.26 per bushel statutory loan rate reduction?

A: The system developed in 1987 has been used every year for soybeans but was last used to establish 1995 loan rates for wheat and feed grains when the previous Administration chose to freeze county loan rates for those commodities. Therefore, soybean loan rates have been adjusted to reflect changing market prices since 1986, while loan rates for wheat and feed grains have not.

Congress reduced the soybean loan rate for 2002 and subsequent crops by $.26 per bushel. After taking into account changes in markets this past year and weighting loan values to take into account the actual production in soybean producing counties, proposed reductions in individual county loan rates range from $.24 to $.27 per bushel. We believe that this same type of range would have occurred for 2002 crop feed grains and wheat if we had not further refined the loan-rate system to take into account class differences (for wheat) and if loan rates had not been frozen since 1995.

The 1995 loan rates were established in an era of production control programs when CCC program payments were primarily tied directly to what was produced on a farm. In 1996, for wheat and feed grains, Congress established programs that de-coupled payments from production and did not extend authority to the Secretary of Agriculture to establish production control programs. In addition major changes have occurred in the market place since 1995. For example, wheat production has fallen from 69.1 million acres in 1995 to a projected 59.0 million planted acres for the 2002 crop year, and soybean acreage has increased from 62.6 million acres to a projected 73.0 million planted acres for 2002. These changes are largely in response to the flexibility afforded to producers under the Federal Agriculture Improvement and Reform Act of 1996.

Q: Why did CCC establish proposed loan rates for wheat on a class basis for the first time in 2002?

A: Different types of wheat are used to produce different types of products that have different consumer values in the marketplace. The varying supplies of these different classes of wheat and changing patterns of demand produce widely varying market prices. For example, the 2001 loan rate for Hennipan County, where Minneapolis is located, is $2.96 per bushel for all classes of wheat. On June 3, 2002, CCC's quoted terminal price Minneapolis for hard red winter (HRW) wheat (used to produce bread) was $3.36 per bushel; the price of hard amber durum (HAD) wheat (used to produce pasta) was $4.45 per bushel; and the price of hard red spring (HRS) wheat (generally used to produce a blend to make better bakery products) was $3.49 per bushel.

Because Congress has significantly increased the national average wheat loan rate, we believe that it is the appropriate time to establish loan rates that are in line with market forces in order to avoid over-production of wheat in a county in response simply to the benefits that are available under the marketing loan program. By moving to a class-based system, CCC will be providing marketing assistance loans and LDP's that reflect actual market prices, which will provide a more equitable distribution of commodity program benefits. Producers will take into account market signals and place less reliance on county loan rates when making planting decisions.

This class-based approach has been used for many years by CCC for other commodities such as cotton and rice that have readily identifiable market prices by grade or class.

Q: How does this decision to update 2002 crop loan rates correspond to other parts of the Food Security and Rural Investment Act of 2002?

A: We believe that updated loan rates not only provide a fairer distribution of marketing assistance loan benefits, but they also provide a more accurate representation of current conditions on individual farms, much like the opportunity provided in the 2002 Act to producers who wish to update program crop acreage bases and, if they elect to update bases, the opportunity to update farm program payment yields.

Q: How does the decision to update 2002 crop loan rates affect producers with outstanding 2001 crop CCC loans?

A: This decision will not affect 2001 loan rates. However, in the process of updating 2002 crop feed grain loan rates, CCC has also updated the terminal markets used by CCC to establish PCP's. Over the past 15 years, CCC has routinely used different terminal markets for the same county as market conditions have changed. Accordingly, this decision of CCC to use these new markets to establish PCP's for producers with outstanding 2001 crop loans will be handled in the same manner as in prior years.

Q: How would the decision to update 2002-crop loan rates affect 2003-crop loan rates?

A: There is no statutory connection between the county loan rates for these crop years. But, by updating loan rates this year and concurrently updating terminal markets and differentials for feed grains, loan rate determinations for 2003 should be made more timely and with significantly fewer and less dramatic changes.

Q: How will loan rates for producers with 2002 crop loans that already have been made be handled?

A: Producers who pledged 2002 crops as collateral for CCC marketing assistance loans were issued loans based on a loan rate that was $.10 less than the 2001 county loan rate. An additional loan disbursement will be issued when the 2002 county loan rate is higher than the preliminary loan rate.

Q: Will further adjustments to the 2002 county loan rates be made?

A: No. The announced loan rates are the final 2002 rates except in isolated cases where adjustments are made to correct for statistical and related errors. PCP's for wheat, feed grains and oilseeds will continue to be adjusted daily. PCP's for producers in counties that have been assigned new terminal markets, and PCP's for producers in adjoining counties, will be given special attention for the next several weeks by CCC so that further adjustments can be made to lessen differences in marketing loan gains in neighboring counties that result from using the new terminal markets and loan rates to establish payment and repayment PCP's.

Q: Will the new terminal markets used in establishing feed grain PCP's be used for any other purposes?

A: Yes. CCC uses these terminal markets as benchmark prices in analyzing bids in the sale of CCC inventory and the purchase of commodities for use in various food aid programs, including purchases under Food For Progress and Title II of Public Law 83-480. These prices are also used in calculating payments under the Bioenergy Program and are used by the Risk Management Agency for insurance purposes.

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