Corn and soybean growers should consider steps to help offset an eclipse of the $75,000 government payment limit, or prevent loss of potentially high loan deficiency payments (LDPs) due to increased cash prices.
The $75,000 limit could increase if proposed emergency assistance in the $7-billion-plus range is passed by Congress and signed by the president. Legislation in both the House and Senate would either lift the limit for two years or increase the amount. But there are never any guarantees as to how or when legislation will impact growers, many of whom could be harshly hit by the $75,000 limit.
"Even moderately sized farms will be impacted," explains Steve Amosson, Texas A&M University extension economist. "It's an awkward situation at best."
Robert Wisner, Iowa State University extension economist, says Midwestern growers with even 1,000-1,200 acres could lose LDP if harvest prices are as low as some fear. If storage space is unavailable and growers must move their crop, medium-sized and large farms could be substantially penalized by the payment limit.
Growers with old-crop corn and beans in storage should be able to avoid the limit by "taking as much of the marketing loan/LDP payment as the limit allows," says Wisner. "They would then forfeit the remaining grain under loan to the Commodity Credit Corp. (CCC) in fulfillment of loan obligations, if prices are below the loan rate plus accumulated interest."
The plan should also work for new-crop grains - if storage space is available. However, the cost of storing the grain nine months until the loan forfeiture could reduce the benefits available as opposed to selling the grain at harvest and taking the LDP, says Wisner.
Growers can gauge their posted county prices (PCPs) against cash markets to boost LDPs.
"PCPs are adjusted only once a day, after the market has closed," says Wisner. "PCPs from the previous day's close are usable for redeeming marketing loans or taking LDPs until the market closes the next business day. In a volatile market, PCPs won't move in lock step with the cash or futures market."
As an example, on Monday, Oct. 5, 1998, rain-delayed harvest caused corn and bean futures to rise 5-6 cents/bu, but the previous Friday's PCP remained in place. Net margins for selling grain and taking LDP widened by 5-6 cents/bu during the day. The change in the relationship between PCPs and futures represented a potential net gain up to $11,000 for an 1,800-acre corn and bean operation in central Iowa, says Wisner.
"This situation creates opportunities for additional income gains through careful observations of market movements," he says.
Whether growers face the payment limit or not, they should consider taking advantage of opportunities to lock in a higher price when rallies occur. In mid-August, prices rallied 20-30 cents for corn and more than that for beans. But prices quickly headed back down when the August crop report showed strong overall production.
"There will likely be additional rallies post-harvest," says Amosson. "One strategy would be to take the highest possible LDP when prices are low, store the grain, then 'sell' it for future delivery, even if it means using futures, options or forward contracts well into 2000."