Price Support for Winter Wheat09/12/2016
Developing a post-harvest marketing plan when prices are low can be difficult. In this environment 2016 post-harvest winter wheat marketing plans need to take into account other sources of price support. The federal government provides price support through three programs:
- crop insurance,
- farm bill program payments, and
- Marketing Assistance Loans or Loan Deficiency Payments.
Final price received for a bushel of grain could very well be higher than then cash price for the grain itself through additional revenue from one or more of the three sources listed here. This article discusses each of the three sources of additional revenue from wheat production.
Nebraska wheat growers entered the 2016 crop year with a $5.34 per bushel projected price. Final harvest price ended up at $4.15 per bushel. Under a revenue protection policy with and without the harvest price option producers could end up with an indemnity payment due to the lower price. A simple example illustrates how this works. Harvest prices ended up at 77.7% [($4.15/$5.34) x 100] of the fall 2015 projected price. Holding yields constant implies that anyone with an implied coverage level greater than 77.7% could receive an indemnity payment. Contracts more likely to receive an indemnity payment would be those with a coverage level of 80% or 85% and possibly those with a 75% coverage level electing to use Trend Adjusted Actual Production History (TA-APH) and/or Yield Exclusion (YE).
Realized yield will impact the size of the indemnity. A realized yield greater than Actual Production History (APH) will lower indemnity payments, possibly removing an indemnity. Actual yields lower than actual production history add to any indemnity payments. Receiving an indemnity based on price is different from receiving an indemnity based on yield because the future yield guarantee, or future value of insurance, is not affected.
Farm Bill Program Payments
The bulk of Nebraska farms with wheat base acres are enrolled the Price Loss Coverage (PLC) coverage program. The PLC program protects farmers from prices falling below a set level, called a reference price. Payments for wheat acres enrolled in the PLC program will be the difference between the reference price, $5.50 per bushel, and the marketing year average price or the national marketing assistance loan rate, $2.94 per bushel, whichever is higher. Payments will be based on PLC yields and made on 85% of base acres.
The 2015/16 Marketing Year Average Price for wheat was $4.89, making the payment $0.61 per bushel per qualifying base acre. The PLC payments for the crop harvested in 2015 will be paid in October 2016.
USDA ERS predicts Marketing Year Average Price for wheat will be between $3.70 and $4.21, making the payment between $1.29 and $1.80 per bushel per qualifying base acre. It is important to remember that PLC payments for the crop harvested in 2016 will not be paid until October 2017.
The MYA price estimate changes every month, and there is no guarantee that the estimated payment shown will be the final payment. All counties will receive the same payment rate under the PLC program.
If you have wheat base acres enrolled in the Agricultural Risk Coverage – County (ARC-CO) program, visit farmbill.unl.edu to view the latest payment estimates.
Marketing Assistance Loans or Loan Deficiency Payments
Another price support option is to use USDA marketing assistance loans (MALs) or loan deficiency payments (LDP). These programs effectively create a price floor for marketing winter wheat at the county winter wheat loan rate.
A marketing assistance loan is a nonrecourse loan offered through the USDA Farm Service Agency, at an interest rate of 1.5%. A farmer has nine months to repay at the lower of (1) the loan plus interest, (2) the posted county price (PCP), or (3) forfeit their wheat as repayment. The principal of the loan is determined by the “Loan Rate” which varies by county.
Low interest rates make marketing assistance loans an attractive option, reducing interest costs to the farmer. Marketing assistance loans create a price floor at the county loan rate, less the interest cost of the loan, allowing the farmer to store grain and wait for prices to recover from harvest lows.
Using MALs may not be as attractive to farmers with grain stored at an elevator because you likely will pre-pay nine months of storage in order to take this loan. If a farmer sells the wheat before the nine months, the storage fees will be reimbursed. Additionally, some elevators are also charging extra handling fees to farmers who are taking a MAL.
If you do not use an MAL, you qualify for a Loan Deficiency Payment (LDP). An LDP payment is available when the PCP falls below the county loan rate. You can take an LDP payment on wheat that you have beneficial interest in. You do not have sell your wheat on the day you take an LDP payment.
For more information about marketing assistance loans and LDPs contact your local USDA Farm Service Agency. Producers need to apply for any marketing assistance loans or LDP assistance before losing beneficial interest in the commodity, so it is important to contact the Farm Service Agency office before implementing any other marketing decisions.
While current winter wheat cash prices are low, producers will likely realize a higher total price due to other sources of revenue than just the current crop cash price due to federal price support programs. Crop insurance, specifically a Revenue Protection (including Harvest Price Exclusion), may provide additional income through a low price if a high coverage contract was selected and yields were not excessively higher than APH. MALs may provide a higher selling price than the current cash price, especially if price discounts are large. LDP can help ($0.38 per bushel at the time of this article) if the producer owns a beneficial interest in grain.
Low grain prices complicate the marketing decisions through rules embedded in government programs. It is advisable to become acutely aware of how each government price support program operates so the farm has the best chance of receiving the highest possible price of grain.
Source: University of Nebraska-Lincoln