History tells us that the largest corn loan deficiency payment (LDP) typically occurs at harvest. In most years, it comes early in harvest, before the halfway point in the U.S. corn harvest. As of Sunday, September 18th, 11% of the U.S. harvest was complete.
"Expect history to repeat itself in 2005," says Steven Johnson, farm management field specialist with Iowa State University Extension. "The 2005 corn crop is smaller nationwide than last year. But corn carryout is still expected to hold steady at 2 billion bushels by the end of the marketing year on August 31, 2006.
"However, LDPs this year are already larger than in 2004," he adds. "The largest Iowa corn LPD was 33 cents last fall, reaching that level on both October 13 and on November 5."
Maximum LDP may come earlier
"Don't bet that the largest corn LDP will occur that late this fall," cautions Johnson. He sees three reasons why the peak LDP for the 2005 crop will likely be earlier this year than the peak that occurred for 2004:
1) The large number of 2004 bushels of corn under loan late this summer forced USDAâ€™s Farm Service Agency (FSA) to change the formula used to calculate the posted county price (PCP) differential to avoid the forfeiture of corn under loan. With the 2004 loans expiring soon and with fewer bushels available to be redeemed, you can expect that FSA will recalculate the differential calculation to create very similar LDPs for all counties across the state of Iowa (the LDP currently varies by 12 cents).
2) Problems with shipping grain in the Gulf of Mexico created a much lower cash price and wider basis. This Gulf terminal price is compared to the Kansas City terminal and the higher of the two is used to calculate the PCP differential. Thus, the Kansas City price has actually been larger than the Gulf in recent weeks. This led to much larger LDPs just as the 2005 harvest began.
3) The Iowa corn crop is 59% mature as of Sunday Sept. 18, versus 35% last year. Corn harvest across the state is already underway. Several grain elevators as well as producers, especially in northern and western Iowa, have added storage in anticipation of the large 2005 crop.
Use a straightforward strategy
"Simply take the corn LDP available as you harvest this fall and while you still have beneficial interest in the crop," says Johnson. "This will create an overall average LDP during harvest. This is the action Iâ€™m recommending as opposed to trying to time an LDP with a previous day's futures price move and â€˜LDPingâ€™ large quantities all at the same time."
Johnson notes two other LDP cautions:
- Make sure that if you deliver grain to a local elevator that your delivery sheets specify what day the grain was delivered. This will be critical at a later date should FSA "spot check" that LDP request.
- Remember the $75,000 LDP payment limit per entity in each farm operation. This means that with a single entity with a 200 bu. per acre average yield and with 40-cent plus LDPs you need only control a little over 900 acres of corn to reach the $75,000 LDP and marketing loan gain payment limit.