Another Settlement Method for Marketing Assistance Loans

By James B. Johnson
Montana State University Extension Service

11/10/99 - BOZEMAN – Producers have a new alternative when anticipating settlement of their marketing assistance loans.

Oct. 19, the USDA Farm Service Agency provided details of how producers can lock in a repayment rate for 60 days in anticipation of settling marketing assistance loans for grain and oilseed crops.

Montana farm managers have used nonrecourse marketing assistance loans for wheat and feed grains for many years. Since 1991, Montana producers of minor oilseed crops have also had these marketing loss assistance loans available.

Marketing assistance loans allow producers to obtain the county loan rates for grain and oil seed commodities if a producer offers the commodity as collateral for a nonrecourse loan. Producers may use these UDSA-provided loan funds for nine full months beyond the month in which the loan was made at relatively low interest rates. These commodities may either be stored on farm or in warehouses.

Starting with the 1991 crop, there were three settlement methods available for marketing assistance loans:

Before or upon loan maturity producers may repay the loan principal plus accrued interest and the commodity under loan will be released.

Or, they may allow the loan to mature and forfeit the commodity to the USDA Commodity Credit Corporation to offset loan principal and accrued interest.

Or, they could repay the loan at the posted-county price for the commodity that prevailed on the day of settlement.

Under this last alternative their commodity held as collateral would be released plus they would receive a marketing loan gain on a per unit basis equal to the difference between the county loan rate for the commodity under loan and the pertinent posted-county price on the day of settlement.

Producers now have one more settlement alternative.

They may now lock in a repayment rate on a marketing assistance loan for 60 days. On a particular date they may observe a favorable posted-county price for a commodity. The posted-county price may be low compared to the loan rate for a commodity. They might not be able to repay their loan on that date for a variety of reasons including insufficient cash. But they want to take advantage of the favorable repayment rate. So they lock in the repayment rate at their local Farm Service Agency office. A request for locking in a repayment may only be completed once for a designated quantity of grain. This quantity may be all quantity under loan or a specific loan quantity less than the loan quantity.

If the producer needs to sell the commodity held as collateral to make use of the locked-in rate and repay the loan, the producer needs to obtain a market authorization from the local Farm Service Agency office prior to moving the commodity.

Consider as an example a producer with 30,000 bushels of winter wheat under loan in a southeastern Montana county with a 1999 marketing assistance loan rate of $2.41 per bushel for wheat. On a late October morning it is determined that the posted-county price for winter wheat is $2.21 per bushel. The producer decides to lock in the $2.21 repayment rate on the full 30,000 bushels at the local Farm Service Agency office. If the producer settles the outstanding marketing assistance loan at this repayment rate, the marketing loan gain will be $0.20 per bushel for a total of $6,000 on the 30,000 bushels. If the winter wheat export price and the local posted-county winter wheat price increase, this producer will likely settle the marketing assistance loan at the locked-in rate.

The locked-in rate is the rate in effect on the date the request is approved by the Farm Service Agency. The rate remains in effect until the earlier of 60 calendar days from the date of approval or 14 days before loan maturity. If the repayment of the quantity at the locked-in rate does not occur before the expiration date on the lock-in agreement, then the loan repayment rate reverts to principal plus interest or the repayment rate in effect on the date of repayment.

Loan quantities may be locked in only one time. Consider another example where a producer has 20,000 bushels of wheat under a marketing assistance loan due to mature in 120 days. The producer had obtained a locked-in rate on 15,000 bushels but did not exercise the settlement in the 60-day period. The producer thought that rates county-posted prices would become more favorable closer to the loan repayment date. But county-posted prices did not go down, they moved up. Now posted-county prices are moving down, but the producer may only lock in a repayment rate on the 5,000 bushels not covered under the first locked-in rate.

"The ability to lock in a settlement rate for marketing assistance loans is basically a government-provided options contract without cost" says James B. Johnson, MSU Extension economist. If the producer with a settlement rate sees posted-county prices moving up within the 60-day period, the producer will likely use the locked-in rate to settle the marketing assistance loan. If the producer sees county-posted prices declining down during the 60-day period, the producer will likely decide to let the lock-in agreement expire.

Producers wanting additional information on how to lock in repayment rates on their marketing assistance loans should confer with personnel in their county Farm Service Agency offices.

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Send questions or comments to Carol Flaherty, MSU Communications Services, Bozeman, MT 59717 or email Flaherty at carolf@montana.edu.

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