Some recent proposals for tightening payment limit rules have discussed replacing non-recourse loans with recourse loans. Eliminating non-recourse loans would somehow keep larger farmers from making as much use of loan deficiency payments or marketing loan gains, the thinking goes. That's pure nonsense, according to one farm policy expert.
“At times, there have been suggestions that the non-recourse loan program be replaced by a recourse loan,” says Richard Bell, president and CEO of Riceland Foods. “Some producers in the Midwest have implied they might support such a change. If this is true, then I would conclude that these producers do not understand the meaning of recourse loan.”
Bell was speaking before the recent Payment Limits Commission workshop in Washington when he made those comments. Most of his talk focused on commodity certificates; the observations about non-recourse loans were a bonus.
“The non-recourse commodity loans offered by the Commodity Credit Corporation are the underpinnings of the entire U.S. farm economy, as well as the world market for farm commodities,” Bell said. “Their availability brings stability to the entire market structure.”
Under current law, a grower can place all or part of his corn, cotton, grain sorghum, rice, soybean or wheat crop in the CCC non-recourse loan program and receive an amount equal to the loan rate for the base and grade of the commodity he enters for a period of time, usually eight months.
A producer's right to forfeit that commodity to the CCC at the end of the loan period, rather than repay the loan, creates the stability, Bell noted. If the loans had to be repaid in cash, prices could fall significantly below the loan rate, and producers would be short of cash and would have difficulty repaying crop loans.
“It could lead to market instability on a wide scale and could drive many growers, especially smaller, less-capitalized ones, out of farming. You might say the CCC non-recourse loan provides them with the opportunity to live to fight another day.”
U.S. farm programs have been around for so long that we forget what a useful role they perform. Prior to the passage of the Agricultural Adjustment Act in 1938, cotton, for example, often experienced wide swings in price, depending on crop size and fiber demand.
To get some idea of what could happen in their absence, you only have to look at the fall of 2001 when cotton prices fell to 27 cents per pound at harvest. Without the non-recourse loan that kept the prices received by farmers near the loan rate of 51.92 cents, many growers would have gone out of business and their local communities would have been devastated.
“In my view, introduction of a recourse loan within farm programs would eventually cause markets to collapse and lead to emergency legislation,” Bell told the commission. “The non-recourse loan is a valuable asset for the U.S. farm economy. It needs to be kept as a central component of the U.S. farm programs.”