Study the program and know your alternatives.
Last month, I explained how to maximize your loan deficiency payments (LDPs). Be careful, though, because if prices stay low into harvest, many midsize farms may run into a $75,000 payment limit.
There is a chance that Congress will increase the payment limit to $150,000. But if it doesn't happen before the election, be ready to use the existing programs to lock in the maximum government program benefit.
The $75,000 limit applies to both LDP and Commodity Credit Corporation (CCC) marketing loan gains. The gain on CCC loans is the difference between the county loan rate and the posted county price (PCP) on the day the grain is released from the loan at your county Farm Service Agency.
In early September, with cash corn bids in the western Corn Belt at $1.30/bu or less, and cash soybeans under $4, producers were eligible for a 40-50›/bu corn LDP and a $1-1.20/bu soybean LDP.
Consider the following scenario. A farmer has 1,300 acres, half of it planted in corn and half planted in soybeans. If prices remain low and his yields are at 150 bu/acre for corn and 50 bu/acre for soybeans, he'll run up against the payment limit.
If you're going to exceed the limit, you have several alternatives to consider.
Before you start collecting your LDP or place any crop under loan, meet with your accountant and be sure you fully understand all of the tax implications of the LDP you receive and the loans you take out.
For many farmers with good yields, trying to manage the tax bill can complicate the $75,000 payment limit.
That said, I want to explain how to max out the payment limit and also get the maximum benefits possible using PIK certificates.
Odds are very good that the lowest PCP and the highest LDP will be available during October. As cash prices work higher into the end of the year, LDPs are likely to decline.
Farmers who exceed the limit still have the option of taking out the CCC loan and then paying off the loan with PIK certificates.
Not all of the details are available on how these new PIK certificates will work, but early indications are that you'll buy the certificates and then use them immediately to lock in the lowest PCP possible. The gains made using certificates don't count against the payment limit.
Another, but less desirable, method is to place the crops under CCC loan and, if prices stay low, forfeit the grain at the end of the nine-month loan. As the merchandising worksheets show, taking as much LDP as possible now and then selling ahead into next spring and summer is your most profitable move.
Taking the LDP and selling the carrying charge ahead into next spring is the best merchandising method to market your 2000 crop. If you want to reown the crop later, you can buy back with call options or futures.
For producers with good yields, the LDP plus carrying charge will generate the dollars per acre that can create a profit.
The corn and soybean merchandising worksheets are available at our Web site at www.northstarcommodity.com.