The extremely low prices farmers have experienced this summer and fall have triggered a relatively little known program within the Federal Agricultural Improvement and Reform Act of 1996 (otherwise known as the 1996 Farm Bill or the FAIR Act). The loan deficiency payment (LDP) program is embedded in the nonrecourse marketing assistance loan program that exists for 16 crops. This program provides producers with financial tools to alleviate possible short-term cash flow needs without selling their crop, thus allowing farmers to store production and market their crops when conditions are more favorable.

When producers enter the program, they can choose to receive a loan against their crop, or if prices are low, they can choose to be paid an LDP instead of taking out a loan. The LDPs are direct payments to farmers that do not have to be repaid. The LDP rates change daily and are determined for each county and crop according to loan rates and calculated posted county prices (PCPs). If the loan rate is above the PCP, producers are eligible for LDPs, and the LDP rate is the difference between the loan rate and the PCP. County loan rates are based on the national loan rate, a 12-month average PCP, production data, and the distance to terminal markets. The PCP is a price formulated to mimic crop marketing conditions in the county and is based on terminal market prices, adjustments reflecting market and transportation factors.

Historically, the LDP portion of the loan programs has rarely been in effect. Prices have stayed above the LDP trigger levels. In 1995 and 1996, no loan deficiency payments were made. In 1997, LDPs were available for wheat, barley, oats, and upland cotton. Producers received just more than $2 million with the vast majority going to cotton producers. However, the recent price changes for crops this summer and fall have opened the LDP provisions to producers of at least 10 commodities, and farmers have taken advantage of this opportunity. Table 1 shows the quantities on which LDPs have been paid, the dollar amount of these payments, and the average rate per unit.

The LDP amount for oats alone is nearly five times the total amount paid through LDPs for 1995-97 for all crops combined. Wheat, corn, and soybean producers have received the lion’s share of this year’s LDPs. More than half of the wheat crop was placed in the LDP program. The total payouts under the LDP provisions have reached more than $1 billion and continue to increase. (Data in Table 1 are preliminary since producers have several more months in which they can take advantage of this program if prices remain low enough.)

Based on the latest national crop estimates, nearly half of the U.S. wheat crop has entered the LDP program. Barley producers have enrolled 57 percent of the 1998 crop. One-third of the oat crop has been placed in the LDP program. For corn and soybeans, the percentages of the 1998 crop in the LDP program are 13 and 25 percent, respectively. Cotton producers have placed only 0.5 percent of the 1998 cotton crop in the program, while sorghum producers have placed 19 percent.

Earlier this fall, policymakers in Washington debated the merits of removing the cap on national crop loan rates. Under the FAIR Act most commodity loan rates are capped at the 1995 crop year loan rate. If this proposal had passed and been applied to the 1998 crop, it would have had a significant effect on LDPs. Estimated effects are shown in Table 2. It is assumed that producers would have the same choices between the commodity loan and the LDP.

Under the loan rate cap removal, LDPs for the seven crops listed in Table 2 would have increased by $1.5 billion. Wheat farmers would have been the biggest beneficiaries of this change, receiving half of the increase. Wheat LDP amounts would have tripled. The other crops also gain significantly, from 1.7 times the actual amount for soybeans to 2.6 times the actual amount for upland cotton.

Table 1. 1998 LDP National Figures as of November 12, 1998

Table 2. Possible Effects of Removing Loan Rate Caps