The US instituted a non-recourse marketing loan program to enable farmers to avoid having to sell
their crop at harvest time, a time when prices are usually at their annual low. Instead of selling their
crop, farmers can take out a 9-month, low-interest loan with the government. Farmers often use the
loan to payoff production expenses, but there are no conditions on how they can use the loan.
The farmer can then wait for higher prices before paying off the marketing loan plus the accrued
interest. This marketing loan has allowed farmers to engage in the orderly marketing of their crop at
prices that are higher than those available at harvest. In the case where the market value of the
crop at the end of 9 months does not exceed the value of the loan plus accrued interest, the farmer
can forfeit the crop to the government as full payment of the loan. The farmer does not have to make
up any shortfall in the value of the crop at the time of forfeiture; the government does not have
recourse to any of the farmer's other assets to payoff the difference.
This marketing loan program is at the center of the APAC/TFU (Agricultural Policy Analysis
Center/Texas Farmers Union) supply management program. The key to its role in the proposed
program is the level at which the loan rate is set. The goal is to set the loan rate at a level where
there is no need for additional programs.
In the past, when the loan rate was set too low, Congress had to establish a second Counter-Cyclical
Payment program (CCP) to provide the level of net farm income necessary to maintain a robust crop
It makes little sense to us to develop a secondary program to make up for the deficiencies of the
primary commodity program, whether the primary program is the historic supply management
program, the unencumbered free market program that resulted from the adoption of the 1996 Farm
Bill, or the current revenue insurance program.
The task before the Congress as it writes the 2018 Farm Bill is to develop a program that gets the
policies right in the first place so there is no need for counter-cyclical payments, emergency
payments, loan deficiency payments, or payments under either the current Agricultural Risk
Coverage or the Price Loss Coverage programs.
In the APACjTFU proposal, the loan rate for corn is set at 95 percent of the olympic average of the
national full cost of production for the prior five years. History indicates that once the marginal
over-supply is taken off the market the minimum season average price paid to farmers for their corn
is generally at least 10 percent above the loan rate.
Because corn is the dominant crop in the US, the loan rates for other crops are set at their historic
ratio to corn. Over the last decade the corn-to-soybeans ratio of the season average prices paid to
farmers was 2.5 to 1 (2.5:1); for wheat, the ratio was 1.44:1. The loan rate for all covered crops was
set to their historic ratio. The one crop for which the APAC modeling does not use the historic ratio
is grain sorghum. The corn to grain sorghum ratio was set at 1: 1 to encourage the raising of dryland
grain sorghum instead of irrigated corn over the Oglala Aquifer, slowing the depletion of that
By using the historic ratios, the loan rates do not skew the planting decisions of farmers. For
instance, when the soybean-to-corn ratio increases to 2.8:1, some farmers will reduce their acreage
of other crops to produce more soybeans. Similarly, ifthe soybean-to-corn ratio drops to 2.2: 1,
farmers will move acreage out of soybeans and into another crop, increasing total corn acres. By
using the historic ratios, the APACjTFU supply management program allows for planting flexibility
rather than crop by crop interventions.
The commodities that are forfeited to the government under the marketing loan program are held by
the government until they are needed by the market because of a production shortfall or an
unanticipated increase in demand. The price at which agricultural commodities are sold into the
open market is called the release price. In the model, the release price was set at 1.75 times the loan
Establishing a wide price band allows the market to work relatively efficiently in guiding farmer
planting decisions and allocating the available supply among competing uses. At the one end, the
loan rate protects farmers from long periods of low prices and at the other the release price sets an
upper bound, protecting consumers.
As we have seen in the 2007-2012 period, neither is an extended period of prices well above the full
cost of production in the best interests of farmers because those prices bring sufficient resources
into production to result in an extended period of low prices, as we have seen over the past 4 years.
Dr. Harwood D. Schaffer: Adjunct Research Assistant Professor, Sociology Department, University of
Tennessee and Director, Agricultural Policy Analysis Center. Dr. Daryl/ E. Ray: Emeritus Professor,
Institute of Agriculture, University of Tennessee and Retired Director, Agricultural Policy Analysis
Center. Email: http://www.agpolicy.org.
Wes Sims, President
|Texas Farmers Union, P.O. Box 738, Sweetwater, Tx 79556|