The Commodity Certificate Exchange program authorized by the Consolidated Appropriations Act of 2016 was implemented by USDA’s Farm Service Agency in early March, providing relief to farmers facing payment limitation issues related to their marketing loan benefits. The act was signed into law on December 18, 2015.
The program, beginning with the 2015 crop, allows cotton producers with outstanding marketing assistance loans (MALs) to redeem the MALs using commodity certificates under the same terms and conditions that were in effect for the 2008 crop year which were removed in the Agricultural Act of 2014 (the Farm Bill). The net effect for farmers is loans redeemed that generate a marketing loan gain (MLG) will not count against the $125,000 combined payment limitation for ARC, PLC and marketing loan benefits.
Prior to reinstatement of the program, PCCA staff spent countless hours monitoring payment limits on behalf of its members. It also made marketing of the coop’s pool cotton more difficult.
“We had to design an entire online system that was current up to the minute to allow us to know if members were about to exceed their payment limit,” said Greg Bell, PCCA’s Vice President of Administration and Human Resources. “The implementation of commodity certificate exchanges allows us to monitor payment limits on LDPs only.”
MLGs are created when the loan redemption rate is below the outstanding loan amount at the time the loan is repaid. The redemption rate is calculated by subtracting the adjusted world price (AWP) from the base loan rate for the cotton placed in the loan. For the entire 2015-16 marketing year that began on July 1, the AWP has been below the base loan rate of 52 cents per pound. Consequently, some farmers sooner or
later would be facing payment limit issues when their cotton is redeemed. Also, redeeming the cotton with the commodity certificates enables farmers to avoid adjusted gross income (AGI) and actively engaged issues.
However, the program does not apply to loan deficiency payments (LDPs) which will continue to be subject to payment limits and AGI provisions. In lieu of an LDP, farmers can avoid these constraints by using what is commonly referred to as a “turn-around loan.” Under this scenario, the cotton goes into and out of the loan on the same day, and PCCA announced on March 7th it had authorized turn-around loans for the 2015 crop.
“Producers who have reached their payment limit, or are “Benefit Ineligible” for an LDP due to AGI or Actively Engaged flags can utilize the turn-around loan process in order to receive the MLG, which is equivalent to an LDP payment,” said Steven White, PCCA’s Director of Grower Services & Gin Accounting, in a letter to coop gin managers and clerks on March 7th. “After we put the cotton in the loan, we take the loan check and immediately repay the loan at the AWP, resulting in a net check to the producer,” White explained. Only the loan service fee and the Cotton Board fee totaling approximately $3.14 per bale are deducted from the MLG.
“PCCA will only perform a turn-around loan on cotton that has traded over The Seam,” White said. “The resulting check will be issued jointly payable to the producer and any lien holders on his account. Additionally, the gin will not be able to withhold gin collections on the turn-around loan. Gin collections will be handled on The Seam invoice, as usual.” Turn-around loans can be requested prior to 2:00 p.m. each day, excluding Saturday and Sunday.
Reinstatement of the Commodity Certificate Exchange program will help mitigate the effects of low cotton prices and high production costs by enabling farmers to maximize their ARC and PLC benefits on eligible crops.