USDA Trying to Plug Loophole in Loan Repayment Scheme

September 30, 1999

Some farmers have figured out a way to lock in increasingly lower repayment rates on their USDA loans and realize a larger gain between the repayment rate and the loan rate. USDA is about to propose a way to stop the practice. Farmers are "sort of taking advantage of our rules," says one official. A meeting is scheduled for today between USDA officials and representatives of various commodity groups to work out a solution.

The normal procedure is for a farmer to take out a loan and when he decides to repay it, the posted county price (PCP) on the day of repayment is the repayment rate. So if a farmer takes out a $2 per bushel corn loan, and three months later wants to repay it and the PCP for that day is $1.80, the loan is repaid at $1.80 per bushel, a 20-cents per bushel gain for the farmer.

USDA's Farm Service Agency also maintains a form 681-1. One FSA official explains that if a farmers takes out a loan and cannot repay it, the form 681-1 may be used. Normally a farmer repays the loan and then sells the grain. Using the 681-1 allows the reverse process: a farmer may sell the grain and repay the loan. There are two basic requirements: the farmer must need the proceeds of the sale to repay the loan, and the grain supporting that loan must be stored on the farm.

A form 681-1 is good for 15 or 30 days. When it expires, the provisions of the form are not binding on the producer; if the producer didn't pay off the loan within the 15 or 30 days, the 681-1 simply expires and the loan remains in effect and unpaid.

However, the FSA official explains, many producers were locking in a repayment rate, say at $1.80, then using the form 681-1. As prices continued to decline, the farmer would let the 681-1 expire and fill out a new form at an even lower rate. Theoretically this could continue as long as the PCP continued to decline; farmers would realize ever increasing gains between the repayment rate and the loan rate.

USDA decided to work up a proposal that would lock in the first repayment rate on a form 681-1; the farmer couldn't change it regardless of whether the PCP declined or not. At the end of the nine month loan, the farmer can forfeit the grain or repay at the locked in rate.

But the proposal never was released officially. It is expected USDA will propose some type of resolution to the problem once the commodity organizations have met with FSA officials.