Marketing Assistance Loans (MALs) are a financial tool provided by the U.S. Department of Agriculture to help farmers manage cash flow and market timing for their crops. These loans allow producers to use their harvested commodities as collateral to borrow money at a low interest rate shortly after harvest. The purpose is to give farmers the flexibility to store their crops and wait for better market prices rather than selling immediately at potentially lower prices.
What are Loan Deficiency Payments?
Loan Deficiency Payments (LDPs) are a related program that offers a direct payment to producers who agree not to take out a Marketing Assistance Loan. LDPs are made when the market price for a covered commodity falls below the loan rate established by the USDA. Essentially, the payment bridges the gap between the market price and the loan rate, providing financial support without the need to pledge the crop as collateral.
Crops Covered by MALs and LDPs
Marketing Assistance Loans and Loan Deficiency Payments cover a wide range of commodities, including corn, wheat, soybeans, cotton, rice, barley, oats, and several others. These programs are designed to assist farmers growing staple crops with managing income and marketing decisions.
How Marketing Assistance Loans Work: A Real-World Example
Consider a wheat farmer in Kansas during the 2022 harvest season. Suppose the USDA sets the loan rate for wheat at $3.95 per bushel. After harvesting, the farmer expects market prices to be low due to a recent bumper crop nationwide, with the current market price at $3.70 per bushel.
The farmer can take out a Marketing Assistance Loan by pledging the harvested wheat as collateral, borrowing $3.95 per bushel for the quantity pledged. This loan provides immediate cash flow, allowing the farmer to cover expenses or wait for prices to improve. If, later in the marketing year, the market price rises to $4.20 per bushel, the farmer can repay the loan at this lower rate, sell the wheat at the higher market price, and benefit from the increased revenue.
If market prices do not improve and stay below the loan rate, the farmer has the option to forfeit the pledged commodity to the USDA as full payment on the loan, protecting them from losses below the loan rate.
How Loan Deficiency Payments Work: A Real-World Example
Alternatively, if the same wheat farmer chooses not to take out a Marketing Assistance Loan because they prefer not to pledge the commodity, they may be eligible for a Loan Deficiency Payment if the market price remains below the loan rate.
For example, with the loan rate at $3.95 and the market price at $3.70, the farmer could receive an LDP of $0.25 per bushel on their wheat production without taking out a loan. This payment helps offset the lower market price, providing immediate financial relief.
Key Features of MALs and LDPs
Both programs are intended to improve farm liquidity and provide price support without direct subsidy payments. Marketing Assistance Loans offer flexibility in marketing timing and protect against price declines, while Loan Deficiency Payments provide an upfront cash payment without the need for loan collateral.
Producers must meet eligibility criteria and enroll in these programs during specific sign-up periods. The choice between taking a loan or accepting an LDP depends on the farmer’s marketing plans, cash flow needs, and risk tolerance.
Enrollment and Risk Management
Farmers interested in MALs and LDPs should work with their local USDA Farm Service Agency office to enroll and understand program requirements. These programs are often used alongside crop insurance and other farm safety net tools to provide a comprehensive risk management strategy.
Conclusion
Marketing Assistance Loans and Loan Deficiency Payments are valuable tools that help farmers manage income timing and mitigate price risks. By offering flexible financing and direct payments tied to market conditions, these programs support farm operations during times of price uncertainty. The 2022 Kansas wheat farmer example illustrates how producers can leverage MALs and LDPs to maintain cash flow and optimize marketing opportunities throughout the year.
