August 23, 2001

Market Advisor: Evaluate Loan Deficiency Payment Rates as Crops Are Harvest

by George Flaskerud, Crops Economist
NDSU Extension Service

Taking the loan deficiency payment (LDP) at harvest has generally been the best strategy during the past three years, according to a recently completed study. The results are detailed in North Dakota State University Extension Service publication EC-1214, LDP Rates for Select Crops and Locations in North Dakota, and is available from your local extension agent. It can also be found at http://www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm .

LDP rates need to be considered in conjunction with marketing strategies. Taking the LDP at one time and selling at a later date results in financial risk of decreases in crop prices and total revenue less than loan.

The analysis focused on two strategies. The first one involved the timing of taking the LDP, which would be in lieu of securing a loan from the Commodity Credit Corporation. The second involved securing a loan and repaying the loan at the posted county price (PCP) where the PCP may be locked in for 60 days. Details and policy updates on procedures for the strategies should be obtained from the local Farm Service Agency.

The best time to take the LDP and the best time to sell the crop were analyzed with the objective of maximizing profit. Selling strategies in this study were limited to cash sales using prices adjusted for storage costs, which are explained in NDSU Extension Service publication EC-1011, Basis for Selected North Dakota Crops. The prices were secured from North Dakota Agricultural Statistics for all crops except canola, which were obtained from Archer Daniels Midland (ADM) at Velva, N.D.

LDP rates were collected for the major crops produced in Cass, Ward and Stark Counties in North Dakota. They were collected primarily for Thursdays and Fridays. They were collected from the North Dakota State Farm Service Agency and from Data Transmission Network. The LDP rates were averaged for each month.

Spring wheat LDP rates were the same in Cass and Stark, which were slightly higher than in Ward during 1998-2001. The highest LDP rates occurred during August-September. The highest was in August 2000 followed by August 1999 and September 1998. Marketing strategies that captured the LDP near harvest were the most profitable. The most profitable time to sell the crop was November.

LDP rates for durum varied depending on the time period.

During August 1998 - November 1999, Ward did not have a positive durum LDP rate while Cass and Stark had a few small LDP rates above zero during September, February and March. Cass and Stark had the same rates, which were higher than in Ward.

During August 1999 - May 2000, the monthly average durum LDP rate reached a high during November/December and stayed there during the balance of the period for all three locations. Beginning in December 1999, the LDP rate was about the same at all three locations.

During August 2000-April 2001, the highest durum LDP rate occurred during August-September as would be expected. This rate was also the highest for durum during the study period.

Future marketing strategies that capture the durum LDP rate during harvest may be the most profitable. It would appear that USDA made differential adjustments during September-December 1999, since the LDP rate increased while the durum price received by producers also increased, and the rates at all three locations converged.

Storage of durum into December-January was generally profitable during 1998-2001. Historical seasonal price patterns favor November-December.

The pattern for hard red winter LDP rates was identical for the three locations although their rates differed. Stark had the highest rates followed by Ward and Cass.

Seasonal peaks occurred at different times each year for the hard red winter LDP rates . LDP rates were the highest at harvest in 1998. During 1999, the rates peaked in July and again during October-December. In 2000, the LDP rates were the highest in January-May and again during harvest in August.

A strategy of locking in the PCP at harvest for 60 days would have been appropriate since the marketing loan gain rates were the highest either at harvest or about two months later. Storage was profitable into October for the 1998 crop, May for the 1999 crop and January for the 2000 crop.

The LDP rates for corn were generally the highest during the summer in the year following harvest for the 1998 and 1999 crops. They were the highest during July 1999 for the 1998 crop and during August 2000 for the 1999 crop. For the 2000 crop, they were nearly the highest at harvest. The LDP rates were also substantial at harvest during 1998 and 1999.

Taking the corn LDP at harvest would have been the most profitable for all three years when marketing decisions are examined. Selling off the combine would have been the most profitable for the 2000 crop. For the 1998 and 1999 crops, storage until May was more profitable than selling off the combine.

The barley LDP rates were the same at the three locations. The August-September rates were generally the highest. Capturing the LDP at or shortly after harvest was the best strategy. Cash sales during October-December were generally the best for feed and malting barley. Harvest sales of feed barley may have been the best in 1998, depending on the timing of harvest.

The highest LDP rates for soybeans varied considerably. They were the highest during July 1999 for the 1998 crop, during November 1999 for the 1999 crop, and during April 2001 for the 2000 crop. For the 1998 crop, they were significantly lower at harvest than at their highs. However, capturing the LDP at or shortly after harvest was the best strategy considering marketing decisions.

Selling off the combine was the best marketing strategy for 1998 soybeans since prices declined considerably during the balance of the marketing year. Storage was profitable for the 1999 crop until May and for the 2000 crop until December.

The highest LDP rates for oil-sunflowers occurred at or shortly after harvest during two out of three years. For the 1998 crop, rates climbed considerably during 1999. In contrast, the highest rates occurred during October and November for the 1999 and 2000 crops.

Since LDP rates and market prices usually move inversely, the most profitable strategy during the three years was to take the soybean LDP at harvest. The best selling strategy was to sell off the combine during 1998 and 1999. Storage into the summer of 2001 was profitable for the 2000 crop.

The situation for canola was similar to that for oil sunflowers except for the 1998 crop. The most profitable time to sell that crop was January.

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu