Sequester Trims FSA Marketing Loans By 5.1%

Sequester Trims FSA Marketing Loans By 5.1%

USDA Farm Service Agency advises farmers to anticipate payment reductions.

FAQ: USDA's Farm Service Agency last fall announced adjustments to Commodity Credit Corporation commodity loan programs to accommodate automatic funding reductions. The cuts, known as sequester, are mandated by federal laws passed in 1985 and 2011. Which programs will be affected? How much will they be cut?

SEQUESTER IS HERE: USDA reminds farmers who participate in certain FSA programs to plan accordingly in 2014 for automatic government spending reductions known as sequestration. The Budget Control Act says federal agencies must make automatic annual cuts in discretionary and mandatory spending.

Answer: CCC commodity loan programs, which provide interim financing for ag commodities to be stored after harvest and sold throughout the year when unaffected by harvest-season pressure on prices, are subject to sequester reductions of 5.1%. With commodity loan programs operating on a crop year basis and Sept. 30 marking the end of the federal fiscal year, adjustments have occurred for the 2013 crop year.

Loan-making for all commodities was suspended on Oct. 1 and resumed Nov. 1 to account for software changes. Loan repayment and loan servicing for all disbursed commodity loans continued. Beginning Oct. 1, the 2013 crop loans, and if applicable, loan deficiency payments, or LDPs, received 5.1% reductions. However, 2013 crop loan rates are not affected. Commodity loans issued by FSA, marketing associations and loan servicing agents are all subject to these reductions.

Brad Murray, program specialist at the FSA state office in Des Moines, provided the following answers to some common questions asked by producers regarding the sequester effect on commodity marketing assistance loans. If you have any farm program questions, check with your county FSA office. Also, information is available at the FSA website.

Question: Why is FSA reducing commodity loan amounts?

Answer: The Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011, generally require a reduction in payments under contracts entered into with the Commodity Credit Corporation. This is commonly called "sequester." A 5.1% sequester applies to CCC commodity loans for the 2013 crop year beginning Oct. 1, 2013.

Related: Find Your Local FSA By State

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Question: What does this mean from a farmer's perspective?

Answer: For commodity loans approved on or after Oct. 1, 2013, both the loan amount and the loan disbursement amount for 2013-crop marketing assistance loans are reduced by the same 5.1%. The loan rate established by law does not change, only the amount owed and disbursed.

For example, suppose your county corn loan rate is $2 a bushel. You could place 10,000 bushels under Commodity Credit Corporation loan. Before the sequestration reduction you could have gotten $20,000 (10,000 bushels x $2) minus the FSA service fee of $45. Thus, you would take home $19,955 in cash to pay bills, while you waited to market your corn.

The sequester cut reduces your loan amount by $1,020 ($20,000 x .051). Your revised loan amount would be $18,980. Subtracting the $45 service fee gives a disbursement amount of $18,935. When you eventually repay the loan to free your corn to sell or feed it, you would repay $18,980 (revised loan amount) plus accrued interest at the rate of l.125% for a November 2013 approved loan.

Question: Aren't loan rates set by statute? Can you change them? If not, what are you changing for sequestration?

Answer: Loan rates are set by the 2008 Farm Bill. The sequester doesn't change the loan rate. The loan value is calculated by statute (loan quantity times loan rate); the resulting loan value and disbursement amount is then reduced by 5.1%.

Question: What commodity loans are subject to sequestration?

Answer: Beginning in October, sequestration of 5.1% is being applied to loans for all loan-eligible commodities made on 2013 crops. These commodities include wheat, corn, grain sorghum, barley, oats, upland cotton, extra-long staple cotton, long grain rice, medium grain rice, soybeans, sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe, sesame seed, dry peas, lentils, small chickpeas, large chickpeas, wool, mohair, honey, unshorn pelts, sugar cane, sugar beets and peanuts.

Related: What USDA Farm Service Agency Can Do For You

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Question: Why did FSA need to stop making loans for a few weeks in October?

Answer: FSA stopped making loans on October 1 for four weeks in order to modify software that implements the sequester. Marketing associations and loan servicing agents also needed time to make similar modifications.

Question: That time frame coincides with the government shutdown. How did FSA computer programmers make those adjustments with the government shutdown?

Answer: If the government shutdown didn't happen, the software was to be turned off from Oct. 1 to around Oct. 15 which would have given FSA programmers two weeks to implement the 5.1% reduction into the Marketing Assistance Loan software. But the furlough period of Oct. 1 to Oct. 16 nixed the Oct. 15 date since there was no one to work on the software. When FSA employees returned from the furlough on Oct. 17, the software completion date was moved back to Nov. 4 but was actually completed on Oct. 31. The first date FSA could disburse a 2013 crop loan was on Nov. 1, 2013.

Question: Will CRP payments also be reduced 5.1%?

Answer: Sequestration reductions do not affect CRP payments.

Question: Will 2014 crop year loans also be reduced by 5.1%?

Answer: Unfortunately, those loans will be reduced by 7.2%. We also are asked: Suppose corn prices collapse under big supplies and soft demand and prices go low enough to trigger loan deficiency payments. Do sequester cuts apply to LDPs? The answer is "yes."

Question: Does sequestration of loans save the government any money? Will sequester reductions to commodity loans have an impact on commodity markets?

Answer: The law requires sequestration without regard to whether it saves money. USDA will not speculate on the direction of commodity prices.

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