Little Budget Impact Seen for Certificates

February 18, 2000

USDA Chief Economist Keith Collins sees little if any budget impact from the decision to issue certificates to farmers to redeem their crops under loan. It’s "almost a wash," he says, because of a tradeoff between the cost of forfeited commodities and the cost of issuing certificates.

Farmers, effective Feb. 22, will be able to get certificates from USDA county offices and use them to redeem crops under loan. The program will apply to 1999 and 2000 crops with costs applicable to fiscal 2001.

Asked about the value of the certificates to anyone other than the farmer with a crop under loan, Collins said there should be no secondary market for the certificates. "There should be no secondary market, no trading in certificates," he said. "Certificates should have no premiums. It was absolutely designed to be that way."

Farmers will use the certificates "only if they have a commodity under loan and the posted county price or adjusted world price is below the loan rate and the market price is below the loan rate. You have to have both of those" factors, he said. And if the farmer is bumping up against the $150,000 payment limitation, the loan would otherwise have to be redeemed at the loan rate, making it unprofitable to redeem the commodity in the absence of certificates.

"If you’re not at the payment limit, you don’t need a certificate; it has no value. A certificate enables you to redeem your loan in kind and get the crop back. You can get it back at the AWP or the PCP and not have the difference between the loan and the PCP count against your payment limit," said Collins.

Problems with 2000 crops were expected to be larger than for 1999 crops because of the reversion back to the $75,000 payment limit, said Collins. Still, he added, USDA believes it was better to issue certificates than to take the chance that forfeited commodities would have to be sold back into the market by USDA.

"If you don’t give farmers the certificates, we incur some forfeitures which will cost us storage, interest and the difference between the loan rate and resale price until we dispose of it. Those are the costs associated with handling forfeited crops. If we issue certificates, we do not incur those costs, but the producer gets a loan deficiency payment. The question is how do those two trade off. We think they could be pretty close," he explained.

Without the certificates, "we’d be selling forfeited commodities during the second half of 2000 into weak markets," he added.

The direct benefit will go to the larger producers, Collins admitted, but there is an indirect benefit to all producers because USDA will not be selling forfeited commodities into weak markets. Agriculture Secretary Dan Glickman "had no choice" but to issue the certificates, said Collins, because it was mandatory that certificates be issued under the cotton Step 2 program.

Those certificates go to cotton merchants, not producers. The only way producers could get those certificates would be to pay a premium for them. "Why not give them to producers so they too can get the benefit?" Collins said.

For 1999 crops, Congress already doubled the limit on cash loan deficiency payments. A farmer who is organized into three separate entities – as are many larger producers, especially in the South – can legally receive as much as $460,000 in direct cash payments from the government for this year’s crops. At least in theory, Secretary Glickman has effectively waived even this ceiling on payments, and some observers expect press accounts of multi-million-dollar payments to create controversy in coming months. Meanwhile, the Administration has simultaneously proposed a new income supplement program with lower payment limits than under current law.