E6-10368. Storage Requirements for Grain Security for Marketing Assistance Loans

AGENCY:

Commodity Credit Corporation, USDA.

ACTION:

Proposed rule.

SUMMARY:

This rule proposes changes to the regulations governing the Marketing Assistance Loan Programs of the Commodity Credit Corporation (CCC) that are authorized by the Farm Security and Rural Investment Act of 2002 (2002 Act). CCC is proposing to no longer require a Federally-licensed warehouse operator, or in a State with a warehouse licensing programs, a State-licensed warehouse operator to execute a CCC storage agreement. Nothing in this proposed rule will affect the administration of the United States Warehouse Act by USDA.

DATES:

Comments should be received on or before August 2, 2006.

ADDRESSES:

CCC invites interested persons to submit comments on this proposed rule and on the collection of information required to administer the affected regulations. Comments may be submitted by any of the following methods:

• E-Mail: Send comments to: [e-mail].
• Fax: Submit comments by facsimile transmission to: [phone].
• Mail: Send comments to: Director, Price Support Division, Farm Service Agency, United States Department of Agriculture (USDA), Room 4095-S, 1400 Independence Avenue, SW., Washington, DC 20250-0512.
• Hand Delivery or Courier: Deliver comments to the above address.
• Federal Rulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting comments.

All written comments will be available for public inspection at the above address during business hours from 8 a.m. to 5 p.m., Monday through Friday.

FOR FURTHER INFORMATION CONTACT:

Kimberly Graham; phone: [phone]; e-mail: [e-mail], or fax: [phone].

SUPPLEMENTARY INFORMATION:

Background

Since the enactment of the Agricultural Act of 1949, the major activity of CCC has been the administration and implementation of nonrecourse marketing assistance loans to producers of major agricultural commodities. Generally, Congress established loan rates for certain commodities, e.g. $1.95 per bushel for corn, for the 2004 through 2007 crop years. Under nonrecourse loan provisions, the producer may satisfy the loan obligation through forfeiture to CCC of the commodity pledged as collateral for the loan.

Since 1949, the commodities pledged as collateral for these loans could be stored on the producer's farm or in approved warehouses. Historically, approved warehouses have been warehouse operators who entered into storage agreements with CCC that set forth terms and conditions regarding: (1) Financial aspects of the warehouse; (2) rates that are applicable to the storage of CCC owned inventory and CCC loan collateral; (3) handling and delivery charges with respect to these commodities; and (4) related storage issues.

Most States, as well as the Department of Agriculture (USDA), have a warehouse licensing regime for the storage of agricultural commodities. In these States, generally, an entity must have a State or Federal license to engage in storing these commodities. These licensed entities issue warehouse receipts that evidence ownership of commingled commodities. In general, those non-licensed entities in States with licensing programs may not store agricultural commodities on behalf of producers but are free to purchase commodities from producers. Accordingly, in such States, commercial feed lots, ethanol plants, wool pools, and other entities that are the “end users” of the commodity are not licensed warehouses and, therefore, may not store commodities on behalf of producers. In those States that do not have such a licensing regime, warehouses must still follow State laws relating to bailment and storage. The State laws relating to bailment and storage may vary from State to State.

As a result of the accumulation of large quantities of commodities forfeited under nonrecourse loans, in the mid-1980's Congress instituted a fundamental change to CCC loan programs when market prices are below the CCC loan rate. The change allows producers the opportunity to repay the nonrecourse loan at a price determined by CCC and to retain any difference between the amount of the loan value and the repayment value. Under these “marketing assistance loans (MAL),” the producer still has the option of forfeiting the loan collateral to CCC. MAL's accomplish two objectives. First, they provide producers with interim financing to continue farming operations without having to market their crop during a period of low market prices. Second, these loans facilitate the orderly marketing and distribution of commodities throughout the year.

The three largest amounts of acreage planted to agricultural commodities for which marketing assistance loans are available are devoted to corn, soybeans and wheat. The following chart shows the estimated production of these commodities, as determined by the National Agricultural Statistics Service of USDA, and the quantity of such crops forfeited to CCC in the 2000 through 2004 crop years. With respect to the 2004 crop, the increase in forfeitures was attributable to the disruption in marketing channels caused by Hurricane Katrina. This hurricane occurred when a significant number of corn and soybean marketing assistance loans matured in the upper Midwest. The closing of the Mississippi River in the New Orleans area and damage to grain handling facilities in that area caused significant reductions in commodity prices. As a result, there was an abnormal increase in forfeitures to CCC; however, to mitigate this impact, CCC provided producers with farm-stored loans the opportunity to store these CCC-owned stocks on their farm for up to 60 days with the option of purchasing the commodity at a price CCC would use in completing a marketing loan transaction. Accordingly, while CCC took title to a larger quantity of 2004 crops compared to the previous two years, such stocks moved into commercial distribution as soon as was practicable in as normal a way as possible.

Commodity year	Production bil. bushels	Forfeitures mil. bushels	Percent of production forfeited
Corn:
2000	9.915	26.596	0.2682
2001	9.502	0.017	0.0002
2002	8.966	1.892	0.0211
2003	10.089	1.037	0.0103
2004	11.807	24.382	0.2065
Soybeans:
2000	2.757	5.704	0.2069
2001	2.890	0.054	0.0019
2002	2.756	0.205	0.0074
2003	2.453	0.122	0.0050
2004	3.123	0.483	0.0154
Wheat:
2000	2.228	12.749	0.5722
2001	1.947	0.442	0.0227
2002	1.605	1.507	0.0939
2003	2.344	2.480	0.1058
2004	2.158	9.401	0.3247

CCC's ownership interest in these major commodities is insignificant. The percentage of other marketing loan commodities owned by CCC as a percentage of total production is similar to these commodities. When a comparison is made with the quantities of commodities forfeited to CCC as a percentage of the quantities pledged as collateral for such loans, CCC takes possession of less than 0.4 percent of the commodities pledged as collateral for marketing assistance loans.

The amount of the monetary gain producers may obtain by repaying CCC marketing assistance loans at repayment rates below their loan rate can be substantial. Therefore, there is a significant incentive for a producer to obtain these loans solely for this benefit. However, both the producer and CCC incur costs in completion of the loan transaction due to costs associated with lien searches and lien filing fees as well as USDA personnel costs incurred in processing these loans. To reduce the costs associated with the delivery of this benefit, producers may simply request that a payment be made to them in an amount equal to what would be realized if the loan had been made and immediately repaid at the lower repayment rate. In return for the payment, referred to as a “loan deficiency payment (LDP)”, the producer agrees that the commodity for which the LDP was provided will not be pledged as collateral for a CCC marketing assistance loan. The LDP amount is equal to the established loan rate for the applicable loan commodity less the repayment rate multiplied by the eligible quantity of the commodity. With respect to commodities such as wheat, rice, feed grains, minor oilseeds, wool, mohair and pulse crops, section 1205 of the 2002 Act provides that these payments are made with respect to “producers on a farm that, although eligible to obtain a marketing assistance loan under section 1201 with respect to a loan commodity, agree to forgo obtaining the loan for the commodity in return for loan deficiency payments. * * *” A similar provision is set forth in section 1307 of the 2002 Act for producers of peanuts.

With the advent of marketing assistance loans and LDP's in the mid-1980's, producers' use of these benefits has shifted substantially from the marketing loan option to the LDP option. The following chart sets forth the number of marketing assistance loans and LDP's approved by CCC as of March 31, 2006, for the 2003, 2004, and 2005 crops.

Commodity year	Warehouse loans	Farm loan	Loan deficiency payments
Corn:
2003	3,465	47,933	99,617
2004	6,952	50,684	1,079,690
2005	4,594	34,031	1,155,137
Soybeans:
2003	3,256	18,538	7
2004	15,258	40,318	463,338
2005	14,239	39,587	86,170
Wheat:
2003	5,749	8,295	103,418
2004	5,440	9,569	55,725
2005	3,596	8,464	17,571

Generally, in those years in which market prices remain below the CCC loan rate, there is a significantly greater use made of LDP's than marketing assistance loans. However, as demonstrated by the issuance of only 7 loan deficiency payments with respect to the 2003 crop of soybeans, and the issuance of approximately 22,000 marketing assistance loans, producers still avail themselves of the loan program for financing purposes.

The CCC storage payment with respect to peanuts and upland cotton pledged as collateral for marketing assistance loan programs encourages the use of such loans instead of loan deficiency payments; thus, the percentages of loan placements for these commodities are statistically larger than for other commodities. Similarly, the use of commodity certificates under section 166 of the Federal Agriculture Improvement and Reform Act of 1996, as amended, (the 1996 Act) also encourages the use of these loans in lieu of loan deficiency payments for several reasons, further skewing the distribution of these benefits. The use of these certificates by large marketing cooperatives facilitates the repayment of marketing assistance loans because the benefits attributable to the use of these certificates do not count against the statutory payment limitation provisions of the Food Security Act of 1985, as amended, which would otherwise limit: (1) The amount of a gain that a producer would be able to receive through a marketing assistance loan; and (2) the amount of loan deficiency payments that would be made to the producer. Thus, the number of warehouse-stored loans made with respect to upland cotton and rice is greater, and the use of loan deficiency payments less, than would otherwise be anticipated in the absence of section 166 of the 1996 Act.

The manner in which agricultural commodities are marketed and used has changed substantially since the enactment of the Agricultural Act of 1949. Changes in commodity marketing and use have been driven in part by the dramatic consolidation in farm operations since the middle 1900's. Advances in agronomics and technology, including biotechnology, have allowed producers to significantly expand the sizes of their operations and benefit from crop specialization and economies of scale. Coincident to this have been structural changes in the livestock and poultry feeding sectors and the remarkable growth in ethanol production. These changes have pushed larger and larger quantities of agricultural commodities into commercial marketing channels and away from the primary on-farm uses of the early 1900's.

Based on the U.S. Census of Agriculture, the number of U.S. farms dropped from 5.4 million in 1950 to 2.1 million in 2002. Much of the loss in farm numbers, however, occurred by the mid-1970's. The 1974 Census of Agriculture reported 2.3 million farms. Despite the slowing decline in farm numbers, the size of farm operations continues to grow. In 1974, there were 32,752 farms with 1,000 acres or more land. In 2002, there were 176,990 farms with 1,000 acres of more land. The number of farms with 2,000 acres or more increased more than 13 fold during this time, going from only 5,862 farms in 1974 to 77,970 farms in 2002.

Accompanying this consolidation in farm numbers and growth in farm size has been a similarly dramatic consolidation in the livestock and poultry feeding sectors. Based on the U.S. Census of Agriculture, 3 out of every 4 farms had cattle and 1 out of every 2 farms had hogs in 1950. In 2002, only 1 in every 2 farms had cattle, and only 1 in every 25 had hogs. Numbers are just as dramatic for poultry. In 1950, 4 of every 5 farms had chickens or turkeys. In 2002, only 1 out of every 14 farms had chickens or turkeys. The consolidation of cattle, hog, and poultry feeding into fewer and larger capital intensive operations has shifted feed use away from the farms where grains and oilseeds are produced. This has left grain and oilseed producers increasingly reliant on commercial grain marketing channels as outlets for their production and sources of their revenue. These structural changes have had a significant impact on the amount of grain used on the farms where it is produced. During the 1949/50 marketing year just more than half of all grain and oilseed (wheat, corn, barley, oats, rye, sorghum, rice, and soybeans) production was consumed on the same farms where it was produced. Since then, while production of these commodities has increased more than three-fold, the amount used on the same farm where it was produced has dropped by more than one-third. The bulk of this decline in on-farm use reflects consolidation in livestock and poultry feeding and specialization in grain and oilseed farming. It also reflects the phenomenal expansion in fuel ethanol production which has grown from a negligible share of domestic corn use in the 1970's to more than 12 percent of domestic use during the 2004/05 marketing year. Less significant, but also affecting this decline in on-farm use has been the shift away from bin-run seed in the small grains and soybean sectors as commercial seed varieties have become ever more dominant.

The decline in on-farm use has substantially increased the volume of grain moving through commercial marketing channels. In the early 1950's, 50 percent of all grain and oilseed production was sold commercially. In recent years, 90 percent of all grain and oilseed production has been sold commercially. As on-farm use has fallen since 1949/50, the volume that is marketed commercially has increased six-fold, twice the rate of increase in production.

CCC nonrecourse loan provisions have been modified over the years to better reflect the needs of producers who must respond to these changes in commodity marketing and use. Particularly important in this regard has been the marketing assistance loan provisions that have given CCC tools like alternative marketing loan repayment rates and the LDP which have significantly reduced the quantity of loan collateral forfeited to CCC. With greater ability to minimize forfeitures, CCC inventories and quantities of grains and oilseeds otherwise controlled by CCC have dramatically declined since the 1980's.

Producers who do not have storage facilities on their farms, and who desire to obtain a marketing assistance loan, may deliver the commodity to a CCC-approved warehouse and tender to CCC as collateral for a loan a warehouse receipt that reflects the quantity and quality of the commodity produced and delivered to such facility. Commodities delivered to other non-CCC-approved warehouses and to facilities that commingle the commodity with the commodities of other persons may not be tendered to CCC as loan collateral, except as provided in section 1201(c) of the 2002 Act.

To be a CCC-approved warehouse the warehouse must enter into a CCC storage agreement and meet certain financial requirements. This agreement was required because, prior to authorization and use of marketing assistance loans, in some years, producers tendered to CCC over 75 percent of the annual production of some crops. If market prices remained below the CCC loan rate, the producers would forfeit the commodity to CCC. CCC required producers with warehouse-stored loans to store the loan collateral in CCC-approved warehouses to protect CCC's interest in the commodity by storing the commodity where CCC could readily assume ownership. CCC takes title from a warehouse according to its agreement upon maturity of the loan with no action needed on the part of the producer. The warehouse receipt is simply endorsed in blank to vest title in the holder, which is CCC. If a farm-stored loan was involved, CCC would direct the producer to deliver the commodity to a CCC-approved warehouse. Other statutes precluded the sale of CCC-owned commodities unless market prices reached certain levels, thus requiring CCC to own commodities for prolonged periods of time. Thus, CCC was dependent upon commercial warehouses for the storage of large quantities of grain, and, in the event of collateral forfeiture, the approved warehouse could continue to store the commodity for extended periods. CCC still requires the storage of its loan collateral only in CCC-approved warehouses regardless of its license status.

Proposed Changes

The first change proposed by this rule is that CCC will no longer require a Federally-licensed warehouse operator also to maintain a CCC storage agreement. With respect to warehouses licensed by USDA under the United States Warehouse Act, the conditions that a warehouse operator must meet for obtaining a Federal license exceed those that must be met for obtaining a CCC storage agreement. While the CCC storage agreement, unlike a Federal warehouse license, specifies storage rates that CCC will pay in the unlikely event the commodity is forfeited to CCC, CCC has maintained a policy since the late 1980's to move commodities it obtains as forfeitures into the market place as quickly as possible. Thus, minimal storage costs are incurred by CCC. Accordingly, CCC has determined that requiring a Federally-licensed warehouse operator to also maintain a CCC storage agreement provides no additional protection to CCC's interests as a lender in the administration of the marketing assistance loan programs and CCC will no longer require such warehouse operators to also maintain a storage agreement. CCC may, however, continue to utilize storage agreements in those instances where it is engaged in the long-term storage of commodities for use in CCC domestic and international feeding programs, i.e. wheat stored under the Bill Emerson Humanitarian Trust.

Second, in a State with a warehouse licensing program, CCC will no longer require the use of a CCC storage agreement for a State-licensed warehouse. In such States, especially those with grain indemnity funds that provide cash payments to depositors in the event of the insolvency of the warehouse operator, CCC has adequate protection as a secured lender. There are redundant costs to the warehouse operator in meeting, and maintaining, compliance with both the State license and the CCC storage agreement. Even without the storage agreement CCC will still have clear title to the commodity in the event of the insolvency of the warehouse operator. If the loan is repaid, CCC has no interest at stake. Thus, for State-licensed warehouses, a CCC storage agreement will not be required, except possibly in the case of the long term storage of CCC-owned grain.

A small number of States do not have warehouse licensing programs. In these States, warehouse operators must still comply with State laws pertaining to storage and bailment. CCC will not require these entities to execute a CCC storage agreement before a producer may obtain a marketing assistance loan with respect to commodities stored in such warehouse, but may require that the warehouse be approved in advance by CCC as a location where CCC loan collateral may be stored using the same general criteria currently used in the administration of CCC storage agreements. In making these determinations, CCC may require that the storing warehouse meet certain financial requirements and that the structure in which the commodity is stored meets conditions needed to protect CCC's interest in these States. A list of approved warehouses may be obtained from FSA State and county offices.

These changes will allow producers to obtain warehouse-stored loans at all warehouses, both State and Federally-licensed, thus expanding the amount of storage available for use by producers who wish to obtain such loans. This is particularly beneficial since commercial warehouse capacity has declined over the past 15 years while the amount of commodities produced in that time has increased—9.4 billion bushels of commercial storage available in the United States in 1990, compared to 8.5 billion in 2005. Production of wheat, corn, soybeans, rice, grain sorghum, and barley during that same time increased from 13.9 billion bushels to 17.3 billion bushels. Marketing patterns have changed during this time, for example, many buyers have turned to a “timed-to-arrive” basis and do not maintain large stocks of commodities at their facilities. The proposed regulatory changes are intended to compliment these changing patterns.

This proposed rule will have no impact on the administration of the U.S. Warehouse Act.

Notice and Comment

Section 1601(c) of the 2002 Act provides that the regulations needed to implement Title I of the 2002 Act, which include those involved here, may be promulgated without regard to the notice and comment provisions of 5 U.S.C. 553 or the Statement of Policy of the Secretary of Agriculture effective July 24, 1971 relating to notices of proposed rulemaking and public participation in rulemaking.

Executive Order 12866

This rule is issued in conformance with Executive Order 12866, was determined to be not significant and has not been reviewed by the Office of Management Budget.

Regulatory Flexibility Act

It has been determined that the Regulatory Flexibility Act is not applicable to this rule because CCC is not required by 5 U.S.C. 533 or any other law to publish a notice of proposed rulemaking for the subject matter of this rule.

Environmental Assessment

The environmental impacts of this rule have been considered consistent with the provisions of the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et seq., the regulations of the Council on Environmental Quality (40 CFR parts 1500-1508), and the FSA regulations for compliance with NEPA, 7 CFR part 799. FSA concluded that the rule requires no further environmental review because it is categorically excluded. No extraordinary circumstances or other unforeseeable factors exist which would require preparation of an environmental assessment or environmental impact statement.

Executive Order 12988

This rule has been reviewed in accordance with Executive Order 12988. This rule will preempt State laws that are inconsistent with it. Before any legal action may be brought regarding a determination under this rule, the administrative appeal provisions set forth at 7 CFR parts 11 and 780 must be exhausted.

Executive Order 12372

This program is not subject to the provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. See the notice related to 7 CFR part 3014, subpart V, published at 48 FR 29115 (June 24, 1983).

Unfunded Mandates Reform Act of 1995

The rule contains no Federal mandates under the regulatory provisions of Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act

Section 1601(c) of the 2002 Act provides that the promulgation of regulations and the administration of Title I of the 2002 Act shall be made without regard to chapter 5 of title 44 of the United States Code (the Paperwork Reduction Act). Accordingly, these regulations and the forms and other information collection activities needed to administer the program authorized by these regulations are not subject to review by OMB under the Paperwork Reduction Act.

Executive Order 12612

This rule does not have sufficient Federalism implications to warrant the preparation of a Federalism Assessment. The provisions contained in this rule will not have substantial direct effect on States or their political subdivisions or on the distribution of power and responsibilities among the various levels of government.

Government Paperwork Elimination Act

CCC is committed to compliance with the Government Paperwork Elimination Act (GPEA) and the Freedom to E-File Act, which require Government agencies in general and FSA in particular to provide the public the option of submitting information or transacting business electronically to the maximum extent possible. The forms and other information collection activities required for participation in the program are available electronically through the USDA eForms Web site at http://www.sc.egov.usda.gov for downloading. The regulation is available at FSA's Price Support Division Internet site at http://www.fsa.usda.gov/​dafp/​psd. Applications may be submitted at the FSA county offices, by mail or by FAX. At this time, electronic submission is not available. Full development of electronic submission is underway.

Federal Assistance Programs

The title and number of the Federal assistance program found in the Catalog of Federal Domestic Assistance to which this final rule applies are: Commodity Loans and Loan Deficiency Payments, 10.051.

List of Subjects in 7 CFR Part 1421

• Agricultural commodities
• Feed grains
• Grains
• Loan programs-agriculture
• Oilseeds
• Price support programs
• Reporting and recordkeeping requirements

For the reasons set out in the preamble, 7 CFR part 1421 is amended as follows:

PART 1421—GRAINS AND SIMILARLY HANDLED COMMODITIES—MARKETING ASSISTANCE LOANS AND LOAN DEFICIENCY PAYMENTS FOR THE 2002 THROUGH 2007 CROP YEARS

1. The authority citation for part 1421 continues to read as follows:

Authority: 7 U.S.C. 7231-7237 and 7931 et seq.; 15 U.S.C. 714b and 714c.

Subpart A—General

2. Revise § 1421.13 to read as follows:

§ 1421.13

Special marketing assistance loans and loan deficiency payments.

(a) Commodities stored in an unapproved storage facility may be pledged as collateral for a marketing assistance loan if the producer:

(1) Makes request of the marketing assistance loan and obtains the commodity certificate to immediately exchange for the requested loan collateral at the same time at the county office that, under part 718 of this title, is responsible for administering the programs for the farm on which the commodity was produced.

(2) Submits the marketing assistance loan request and the commodity certificate exchange before or on the date of delivery to the unapproved facility.

(b) Eligible producers of hay and silage derived from an eligible loan commodity as provided in § 1421.5 are eligible to request hay and silage quantities for a loan deficiency payment in accordance with § 1421.200.

Subpart B—Marketing Assistance Loans

3. Revise § 1421.103(c) to read as follows:

§ 1421.103

Approved storage.

* * * * *

(c)(1) Approved warehouse storage consists of warehouses that are:

(i) If Federally-licensed, in compliance with 7 CFR part 735; or

(ii) If not Federally-licensed, in compliance with State laws and is a warehouse that issues a warehouse receipt that meets the criteria set forth in § 1421.107.

(2) CCC may, on a case-by-case basis, require a warehouse operator that is not Federally-or State-licensed to enter into an agreement with CCC that sets forth requirements to adequately protect CCC's security interest in commodities pledged as collateral for a loan in accordance with this part.

4. Remove §§ 1421.5551 through 1421.5559.

Signed in Washington, DC, on June 16, 2006.

Thomas B. Hofeller,

Acting Executive Vice President, Commodity Credit Corporation.