Rethinking 2006 LDP Strategies

In 2004 and 2005, loan deficiency payments (LDPs) were a big part of harvesttime grain marketing strategies for many farm operators. The extra LDPs in the fall have also been a big plus for the past couple of years from a cash-flow standpoint, adding some much needed crop income late in the year. That extra income was very important to pay for end of year crop expenses, fall anhydrous and fertilizer expenses and for land rental payments that were due late in the year. It doesn’t appear that LDPs will be a significant factor in the fall of 2006 for either grain marketing strategies, or for added income for late-year cash flow purposes in the farm operation.

In 2005, a LDP of $.40-.50/bu., or more, was available on corn throughout most of the harvest season. As a result, many producers requested a LDP on nearly every bushel of corn almost immediately after harvest, in order to take advantage of the extremely favorable LDP rates that existed during the 2005 corn harvest season. For many growers in southern and western Minnesota, 2005 corn yields were 175-200 bu./acre. Since every bushel of corn produced was eligible for a LDP, the net result was approximately $75-100 per corn acre of added fall income from LDPs for many farm operators in 2005.

In 2005, LDPs were also a major component of corn marketing strategies for most farm operators. Growers that had forward priced some of their 2005 corn production for either harvest delivery, or at a later post-harvest delivery date, collected the $.40-.50 LDP at harvest, which was essentially added to the net market price for their 2005 corn. A large number of growers locked-in a corn market price of $2.25-2.35/bu. on some of their 2005 corn. After a $.40-.50 LDP was added, the net market price for the 2005 corn was $2.65-2.85/bu. Other producers in 2005 collected the $.40-.50/bu. on all the corn that was produced, and then marketed the corn in the spring and summer of 2006 for $1.80-2.10/bu., resulting in a net corn price of $2.20-2.60/bu. on their 2005 corn.

2006 LDPs:
2006 is a much different year, from a LDP and corn marketing strategy standpoint, than either 2004 or 2005, and utilizing the same marketing strategy for corn produced in 2006 that was used for 2004 and 2005 corn could lead to some problems. First of all, there were not as many pre-harvest forward-pricing opportunities for corn produced in 2006. Much of the 2006 corn that was forward-priced prior to harvest was at a cash price of $2-2.30/bu. This will likely be the net market price for the 2006 corn with a harvest delivery, given the current LDP scenario. Similarly, it doesn’t appear that harvesttime LDPs will be factor for producers that haven’t priced their 2006 corn and were hoping to add a LDP to the market price of their corn when it’s sold in the spring and summer of 2007. Currently there’s no LDP available for 2006 corn, and the posted county price (PCP) on Oct. 9 was $.30 or more per bushel above county Farm Service Agency (FSA) loan rates in most Minnesota counties. Any time the PCP drops below the county loan rate on a given day, a LDP is available.

There has been a small LDP available during most of late September and early October, depending on location, at FSA offices across Minnesota. For growers that have forward-priced some of their 2006 soybeans for either harvest delivery, or for delivery in 2007, they can collect a soybean LDP at harvest on any day that the PCP is at a low enough level to provide LDP availability. Remember, there is only one opportunity at a LDP on each bushel of soybeans produced in 2006; however, don’t get too greedy. The soybean market could suddenly rise for a couple of days, and the 2006 soybean LDP could be gone.

Some producers will be tempted to use the marketing strategy of collecting the LDP at harvest if available, storing the soybeans and then marketing the soybeans in the spring or summer of 2007. This grain marketing strategy worked fairly well for corn producers in 2004 and 2005; however, it could be a much riskier strategy for 2006 soybeans. Every bushel of corn or soybeans produced in 2006 is eligible to either be placed under a CCC marketing loan, or to receive a LDP, but not both. Once a LDP is received on a bushel of 2006 soybeans, the producer assumes all the downside market risk for any soybeans that aren’t forward priced for future delivery, or that don’t have a price locked-in through a position in the futures or options market. In other words, a producer that accepts a $.09 soybean LDP at harvest in 2006, and ends up selling the soybeans for $4.50/bu. in August 2007 would end up with a net market price of $4.59/bu. This would be well below county loan rates available at most county FSA offices for CCC soybean marketing loans.

CCC Marketing Loans
Farm operators facing some cash flow challenges in the months ahead may want to consider greater utilization of CCC marketing loans for the 2006 corn and soybeans being harvested, in order to provide some extra available income for crop expenses and other cash payments. If the county corn loan rate is $1.80-1.87/bu., and the 2006 corn yields are 160-180 bu./acre, a CCC marketing loan would provide approximately $285-335/corn acre. A 2006 soybean yield of 50-60 bu./acre, at a county loan rate of $4.85-4.95/bu. would provide approximately $240-290/soybean acre from a CCC marketing loan.

CCC interest rates for CCC marketing loans are usually lower than interest rates for more traditional farm operating loans. If market prices and the PCP are low, the CCC marketing loan principal and interest can be satisfied at a PCP that is less than the county loan rate.

Every year in a crop farming enterprise is different – from a production standpoint, from a grain marketing perspective and regarding government program strategies. Using the same LDP and CCC marketing loan strategies in the fall of 2006 that were utilized in 2004 or 2005 could lead to some added grain marketing risk, and could potentially result in cash flow challenges for some farm operators. Producers should review their cash flow needs for the coming months, and their planned grain marketing strategies for their 2006 corn and soybeans, and should then match that with their 2006 LDP and CCC marketing loan strategies. Producers should also be sure to check with their county FSA office regarding eligibility requirements, beneficial interest and other procedures for LDPs and CCC marketing loans.

Editors note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.