It's Not the Market -- It's the LDP!

"Market prices are terrible. We can't produce soybeans for four dollars or less!" That statement represents much of the "coffee shop" discussion that is occurring. However, in most cases, it's not quite accurate. Most of us aren't producing for the market price. We're producing for the market loan price.

When loan deficiency payments (LDP) and market loan repayment (MLR) provisions were written into the current farm law, few gave them much thought. Grain prices were good, demand was strong and producing for the market was the "name of the game." Now more has been produced than the market wants at those good prices, so prices have fallen. Commodity Credit Corporation (CCC) loan rates offer soybean prices approaching a dollar more than new crop cash market bids. Depending upon county loan rate, this means we are producing soybeans for prices somewhat above $5 -- not prices of $4 or less!

Maintaining eligibility for the market loan or being able to use the LDP as a soybean-marketing tool has become very important. Wheat prices below the loan rate and the potential for low corn prices makes the market loan a factor for marketing these crops too. Participation in the Agriculture Market Transition Act (AMTA or the current wheat and feed grain program) is required for corn and wheat, but not for soybeans. Crop acreage reports must be on file and beneficial interest (title, control and risk) in the crop must be maintained. Beneficial interest can be maintained in properly written forward contracts, but it often causes problems with delayed pricing contracts or grower contracts. If in doubt about eligibility, check with the USDA Farm Service Agency (FSA) to be sure.

The market loans or LDP's can be used as risk management or speculative strategies. When we have unpriced crops or put grain under loan, they function as "free" minimum price contracts or put options since they set a price floor at loan rate. The LDP becomes a sales tool if we make cash sales and collect the LDP. The LDP becomes a speculative strategy when we collect the LDP and continue to hold the grain. Hedging or forward contracting the grain and then hoping to use the LDP to enhance the price is also a speculative strategy. Understanding how each strategy works and the risk associated with it is especially important to successfully use the loan or LDP.

USDA is still looking at making changes by going to a national LDP instead of one based on county prices. This may change our price floors somewhat and bears watching. However, regardless of how they determine it, using the LDP or market loan has become a part of our fall marketing strategy. Understanding it and insuring that we are eligible appears to be critical. Soybean prices may go lower. But, at this point, we're not producing for the market. We're producing for the LDP! -- Melvin

Decisive Marketing - June 18, 1999
http://outreach.missouri.edu/agconnection/DCT/DM990618.html -- Revised: April 20, 2004
breesm@missouri.edu