Biden Proposal

As part of the Biden Administration’s broad $33 billion proposal

Marketing Assistance Loan Program

Part of the US farm safety net is the Marketing Assistance Loan (MAL) program.  This program is authorized as a commodity program in Title I of the farm bill.  Congress specifies the loan rate for each eligible commodity.  Corn, soybeans, and wheat are among the eligible commodities.  MAL has two features that potentially benefit farmers.

The first feature is that the loan rate serves as the floor price for the harvested commodities eligible for MAL.  Should cash market prices decline below the loan rate, a farmer receives assistance on the difference.  This assistance can come in one of two types: a Loan Deficiency Payment (LDP) or a Marketing Loan Gain (MLG).  Both provide the farmer with a per unit gross income return; the LDP is a direct payment while the MLG is a reduced repayment on the loan, permitting the farmer to keep the difference.  Loan rates are established by Congress in the farm bill and posted county prices determine whether assistance is triggered.

Farmers of loan eligible crops may take out a loan on the harvested bushels on hand or apply for an LDP in lieu of the loan.  The loan amount equals the per unit loan rate times the number of units placed under loan.  The farmer has use of this loan amount for up to nine months.  A common use of this loan is to pay off higher interest loans, or in economic terms to arbitrage between the MAL interest rate and the interest rate on the farm’s loans.  MAL loan rates are often obtained at harvest when market prices tend to be at seasonal lows and producers tend to have large cash flow needs, providing an option to delay sale of the crop in anticipation of more favorable market conditions.

The MAL loan plus any accrued interest can be repaid at any time during the loan period.  The commodity loan can be repaid in cash, if the market prices are below the loan rate the repayment is adjusted to the lower price and the farmer keeps the difference.  This feature was revised in the 1990s for all crops to avoid forfeitures that had long plagued the program, with the CCC holding billions in forfeited commodities during the 1950s, 1960s and 1980s. Defaulting was historically the method for repaying loans if market prices were below the loan rate, but alternative approaches were developed in an effort to prevent the delivery of the commodities to CCC.  These alternatives are the previously discussed LDP and MAL deficiency payments.

Under the Biden proposal, the loan term for MAL would be extended from nine to twelve months and the loan rate would increase for specific crops (see Table 1). For wheat, the national loan rate would increase 63% from $3.38 to $5.52 per bushel. Pulse crop loan rates would increase 21% and oilseed loan rates would increase 40%, pushing the soybean national loan rate from $6.20 to $8.68 per bushel. All proposed loan rate increases would be well below the current market year average prices. Though relatively large shares of production were put under MAL in the 1990s through early 2000s (see farmdoc daily June 8, 2017), data from FSA and NASS indicates only 3% of total U.S. wheat and soybean production has been put under MAL loan annually, on average, over the past five years.

Because projected market prices are well above the proposed higher loan rates, it is expected that any MAL would likely be taken out as an interest rate arbitrage, using the lower interest rate MAL to pay off an existing higher interest rate loan.  The use of this arbitrage is likely to expand as the Federal Reserve raises interest rates and the cost to borrow rises.  The interest rate for MAL is 1% above the CCC’s cost of borrowing from the US Treasury, lower than typical lender operating loan rates (see USDA FSA Notice). The rate is 2.75% for MAL loans taken out in May 2022 (see USDA May 2022 Announcement

farmdoc 2022 Budgets

Analysis

Although the goal of increasing farm commodity production is desirable, the proposal faces a number of constraints:

• The proposed increase in loan rates is not likely to impact the production of the crops in the current price environment.
• Although a precedent exists with the premium incentive for planting cover crops, an important policy question exists: “Should the crop insurance program be used for policy initiatives not directly related to farm risk?”
• The proposal notably excludes corn. Ukraine is one of the top four producers of corn and contributes over 15% of the world corn exports (see farmdoc daily February 28, 2022). The market indicates more corn is needed and corn is a substitute commodity for wheat. All these considerations suggest a production enhancing proposal should also include corn and other feed grains.
• While excluding corn, the proposal includes rice. Ukraine is not a significant contributor to the world market for rice; over the past five years Ukraine has accounted for 0.01% of the world’s rice production and rice exports (Data Source: ). Rice can be a substitute for food crops experiencing a global shortage due to the war in Ukraine. However, producers cannot easily expand rice production unless already equipped for rice production while the same equipment can be used to grow corn, soybeans, and wheat with small modifications.
• Delayed planting is a potential threat to production in 2022 raising the possibility for prevent plant acreage (see farmdoc daily May 3, 2022 and May 4, 2022). If acres are unable to be planted and late plantings reduce yield potential, the US will face production shortfalls in opposition to production enhancing efforts. The US may consider policy changes to encourage late planting when possible. Strategies will be proposed in Friday’s farmdoc daily article.