USDA Ends Multiple PCP Lock-Ins

October 26, 1999

A practice some farmers have used to gain a few more cents per unit on their marketing loan gain or loan deficiency payment has been ended with a new rule from USDA. USDA now will allow a producer only one chance to lock in the gain or LDP for 60 days. It will be up to the farmer to decide at what point in the marketing year the lock-in should occur to give the farmer the widest margin between the loan rate and the posted county price (PCP).

Prior to the new procedure, farmers could wait for what they thought would be the lowest PCP level they might get, then "lock in" that PCP against the local loan rate for that crop. So if the corn county loan rate was $1.90 and the PCP $1.70, the gain would be 20 cents per bushel. But if the PCP went lower still, the farmer could come back within a specified time period and lock in the lower rate and increase the gain.

Now, the farmer comes in to the local Farm Service Agency and puts a crop under loan. At that point, the farmer can lock in a guaranteed difference between the marketing loan rate and the PCP for 60 days. There can be no further lock-ins. If the loan is repaid within the 60 days, the repayment rate will guarantee the farmer the 20 cents per bushel, assuming the loan rate was $1.90 and the PCP $1.70. If during that 60 days, the PCP were to move to $1.80, for example, the farmer still would get the 20 cents because the $1.70 was "locked in."

Usually, as the marketing year progresses, prices increase as the supply declines. So farmers usually put a crop under loan early in the marketing period when the PCP is at or near its lowest level for the season. So if the loan is not repaid within the 60 days, the farmer is more at the whims of the market because the locked in price no longer applies. The chances are good that the gain realized will be less than had the loan been repaid during the 60 days, because the PCP probably will be higher than it was 60 days earlier.