One aspect of the new Farm Bill that has not received as much attention as some other provisions in the Commodity Title of the new legislation is the provision that increases the Commodity Credit Corporation (CCC) national commodity loan rates for the 2019-2023 crop years. This is the first time in several Farm Bills that the national loan rates for corn, soybeans and wheat have been increased. County crop loan rates at FSA offices are set annually based on the national loan rates.
The new Farm Bill increased the CCC national loan rate for corn by 13 percent from $1.95 per bushel to $2.20 per bushel. It also increased the national soybean loan rate by 24 percent from $5.00 per bushel to $6.20 per bushel, and the national wheat loan rate by 15 percent from $2.94 per bushel to $3.38 per bushel. Besides, affecting the county loan rates, the national loan rate levels also impact the maximum payment levels for the price loss coverage (PLC) option of commodity farm program under the new Farm Bill. The change in the CCC national loan rates will not have much impact on the county yield based ag risk coverage program (ARC-CO) farm program option of the Farm Bill, or individual farm yield based program option (ARC-IN).
Producers enrolled in the PLC farm program option for 2019 and 2020 will receive farm program payments if the market year average (MYA) price for a given commodity for the 12-month market year falls below the reference price for a given crop. The reference prices for the 2019 crop year are $3.70 per bushel for corn, $8.40 per bushel for soybeans, and $5.50 per bushel for wheat. The national CCC loan rate establishes the maximum PLC payment rate, which would be $1.50 per bushel for corn, $2.20 per bushel for soybeans, and $2.12 per bushel for wheat. If crop prices drop below county loan rate levels, producers can potentially, earn loan deficiency payments (LDP’s) on the commodity, which has not occurred for nearly 15 years.
The CCC national loan rates also establish the county loan rates for the CCC non-recourse marketing assistance loans (more commonly known as “CCC crop loans”), which are adjusted based on average crop market prices at a given county location. The CCC crop loans are 9-month loans that can be taken out by producers at county FSA offices on a specific number of bushels following the harvest of a given crop. The CCC loans provide short-term financing for crop inputs and other farm operating needs, and the loans are used by many farmers as part of their annual cash flow planning. The use off CCC crop loans has increased in recent years due to the very tight cash flow positions for many farm operations, along with very low commodity prices at harvest time.
The CCC crop loans allow producers to store grain in on-farm storage without having to sell the grain immediately post-harvest, when commodity prices are usually quite low. This provides farmers with more marketing flexibility to sell the grain, by being able to forward price the corn and soybeans into the following spring and summer months, when commodity prices usually are enhanced. Farm operators can also forward price grain using hedge-to-arrive contracts where they lock-in a futures price on the grain during the year that the crop is grown and set the local basis on the grain when the CCC loan is released and the grain is delivered.
The CCC crop loan rates are usually at reduced interest rates compared the typical farm operating loan interest rates with traditional ag lenders, which make use of the loans quite attractive to farm operators. The interest rates are fixed for the 9-month loan period; however, the interest rates are adjusted on a monthly basis. The current CCC crop loan interest rate for April is 3.50 percent.
The bushels of grain that are placed under a 9-month CCC crop loan are pledged as collateral to the CCC for the crop loan. A “non-recourse” CCC commodity loan means that producers have the option of delivering the commodity at the end of the 9-month loan period, or to pay off the loan principal plus accrued interest. In most instances, it is to the advantage of the farm operators to repay the loan plus interest and sell the grain, which can be done at any time during the loan period. Producers must make arrangements to repay the CCC crop loan before FSA can release the collateral and allow the grain to be sold and delivered to a warehouse or processing plant.
While there are many advantages to farmers that utilize CCC crop loans as part of the financial and marketing management for their operation, there are a few cautions to be aware of with the use of CCC crop loans. These cautions include:
- Remembering that a CCC crop loan is a “Loan” that requires repayment of principal and interest by the end of the 9-month period. Sometimes there is a tendency to take the proceeds from the CCC crop loan after harvest and overlook the timing and amount of the loan repayment in the cash flow planning for the following year.
- The use of a CCC crop loan should not be viewed as a “grain marketing plan.” Utilizing CCC crop loans can be a tool as part of certain marketing strategies to allow more marketing flexibility, while maintaining adequate cash flow ability. Some producers tend to put the corn and soybeans under a CCC loan after harvest and then neglect the grain marketing until the following summer, many times missing some of the best grain marketing opportunities. This approach has been very costly to some farm operators in recent years.
- The use of CCC crop loans can affect the working capital and chattel collateral of the farm business. The CCC loan principal amount would be considered a current liability on the balance sheet, thus reducing the working capital on the balance sheet, unless there is offsetting increase in current assets or reduction in other current liabilities. In addition, the corn and soybeans that are placed under CCC loan are now collateral for that loan and must be deducted from the collateral valuation for traditional farm operating loans. For some farm operations, the adjustments in working capital and the loss of collateral valuation has created some issues as they have renewed their annual operating loans with their ag lender.
The use of CCC crop loans can be a very good management strategy for crop producers; however, it is probably good advice for a producer to consult with their ag lender and farm business management advisor on how the best utilize the CCC loans in their operation. For more information regarding requirements for CCC loans, producers should contact their local Farm Service Agency (FSA) office.