What Will Loan Rates be in 2001?

The U.S. Secretary of Agriculture has the option of lowering crop marketing assistance loan rates for the 2001 season. That decision could have a significant impact on cropping decisions and farm income, says a North Dakota State University farm management specialist.

"Loan rates have become extremely important to farm income because of low grain prices the past three years," says Andrew Swenson of the NDSU Extension Service. "Farmers have become enmeshed in this price safety net. In 1999 North Dakota farmers received $248 million in loan deficiency payments and $17 million gained from paying off government crop loans using the posted county price."

Under the current farm bill, the national marketing loan rates have held at the maximum rates that are allowed: $1.89 per bushel for corn; $2.58 per bushel for wheat; $5.26 per bushel for soybeans; and 9.3 cents per pound for minor oilseeds. Wheat and feed grains have no lower limit for crop loan rates but soybeans and minor oilseeds do at $4.92 per bushel and 8.7 cents per pound respectively. These national marketing loan rates are the basis for making adjustments to county marketing loan rates throughout the country.

"The Secretary of Agriculture has discretion to lower the rates within certain limits," Swenson says. "It’s doubtful that he would chose to lower them, but the choice clearly exists. Bankers and producers are keenly interested in the outcome."

National marketing loan rates cannot be less than 85 percent of the simple average price during the past five years, excluding the high and low price year. According to USDA market year prices for 1996 to 2000 (using the latest estimate for 2000) this is the first year, except for soybeans, that loan rates could be lowered under the formula. National loan rates could be lowered to about $2.43 for wheat, $1.76 for corn and the minimum allowable, $4.92 for soybeans. The legislation also has provisions that allow for further reduction of loan rates for feed grains and wheat if projected U.S. stocks to use ratios are above certain levels.

Marketing loan rates provide a price safety net because producers should be able to receive an amount per bushel or pound that is equal to the loan rate. A producer can choose to get a loan deficiency payment that is the difference between the loan rate and the posted county price which should reflect the local cash price, or take a loan from the government with the grain as the collateral and the loan amount the number of bushels times the loan rate. If a loan is taken the grain can be forfeited in lieu of loan repayment or it can be repaid using the posted county price if it is lower than the loan rate plus interest.

An example: The cash sunflower price is about $4.90 per hundredweight — far below the cost of production. The typical sunflower loan rate in North Dakota (it varies by county) is $9.30. Theoretically, the producer can net $9.30 by taking a loan deficiency payment of $4.40 and selling the sunflowers for $4.90.

Swenson notes that national marketing loan rates are well below the cost of production for wheat and feed grains and closer to the cost of production for soybeans and other oilseeds. Those rates, along with weather conditions, caused a large shift of acreage from wheat and barley to soybeans, canola and flax in north Dakota.

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Source: Andrew Swenson, (701) 231-7379
Editor: Tom Jirik, (701) 231-9629