Iowa Farmer Today
10-20-07
Marketing loans have use this fall
By Gene Lucht, Iowa Farmer Today
For many farmers, $4 corn means no participation in numerous government
programs this fall.
But, items such as Commodity Credit Corp. (CCC) marketing loans could still be
of use to some farmers.
The reason is flexibility, says Steven Johnson, Iowa State University
Extension farm management field specialist. Flexibility is important because
many farmers will be looking at the tax consequences of selling some of their
crop this tax year.
With net farm income for 2007 forecast at $87 billion — an increase of $26 billion
over 2006 and $30 billion over the 10-year average — many farmers will be
looking to defer at least a portion of their new-crop sales until the next tax year to
avoid paying higher income taxes.
The CCC marketing loans can be established at the local USDA Farm Service
Agency office after harvest, so long as beneficial interest is maintained, Johnson
explains.
The proceeds are at a pre-established county loan rate. The rate was 5.75
percent in October. Interest will accrue for up to nine months, then the loan plus
interest must be repaid and the interest deducted as an expense.
Those loan proceeds would be at the county loan rate, which is more than $1 per
bushel below the current cash price for corn and more than $3/bu. below the
current cash price on soybeans.
Producers then need to manage this difference on unpriced bushels because the
loan only protects price at that county loan rate. But, the producer could use the
loan proceeds to reduce interest costs on existing loans, pay some 2007 billS
and prepay a portion of 2008 crop expenses.
The use of the loan proceeds thus can be treated in one of two ways for tax
purposes, either as a loan or as income.
Some farmers may choose to treat this loan like any other loan and not include
the proceeds as income, Johnson says. The producer could elect, under Internal
Revenue Code Section 77, to treat the loan proceeds as a loan, and loan
repayment is not a deductible expense.
If the producer elects to use the income method, the CCC loan is treated as
income in the tax year the loan is received. The loan repayment is not a
deductible expense, but the interest would be when it is paid.
In essence, the program could still be a tool to help farmers deal with the tax
implications of high commodity prices.
Of course, there are many other options.
Johnson says many farmers may choose to take advantage of good futures
prices and a basis that could improve post harvest by using hedge-to-arrive
contracts on March ’08 corn and soybean futures contracts.
Such contracts will mean electing to accept the futures prices and committing
delivery to a processor or elevator this winter. However, there is still a decision
on when and at what level to fix basis on those contracts. The expectation is
basis would improve in the winter and income on the sales could be deferred
until 2008.