A new farm policy proposal by the National Corn Growers Association is being touted as a way for farmers to more easily obtain production financing.

"Access by American farmers to reliable financing is one of the biggest benefits to consider in the context of a counter-cyclical income support program," said National Corn Growers Association President Lee Klein, of Battle Creek, Neb., in his testimony before the House Agriculture Committee April 25.

Klein says he believes the corn group’s commodity price sensitive subsidy proposal, if adopted, may be able to serve as a type of loan guarantee when farmers are seeking production financing. "Our proposed counter-cyclical assistance program will predictably replace reactive, politically negotiated ad hoc financial support. It would be in place and fully operational based on transparent program requirements that provide assistance when commodity prices are low."

"Providing government subsidies to farmers in times of depressed commodity prices, instead of relying on Congress to negotiate supplemental assistance, will better enable growers to obtain production financing through their local lender," he says.

The National Corn Growers Association’s proposal establishes an annual target income for commodities based on the average crop value during the base period and incorporates producer benefits from the marketing loan program and the market loss assistance payments. This base period average income is adjusted for each year of the farm bill by a factor that reflects projected production increases.

For each loan-eligible commodity NCGA anticipates production adjustments for producers who sustained crop losses during the base period. Each year, crop income will be calculated using USDA production estimates and the average price during the first three months of each commodity’s marketing year. Whenever the national crop income is less than the target income, producers will receive a payment based on their eligible bushels, according to Klein.

To further assist growers in their quest for capital, the NCGA’s proposal also includes a recourse loan provision designed to provide producers access to short-term capital without impacting production decisions. The recourse loan, plus interest, must be repaid at the end of the nine-month loan period.

"A farmer’s capacity to borrow is very dependent on the confidence that commercial lenders have in the farm's ability to generate cash flow. When farmers face crop failures or depressed market conditions, bankers are reluctant to lend because the higher the non-accruals, the higher the required deposit insurance premiums charged to the bank, and the larger required loan loss reserve required," Klein says. "Lending officers consider two major issues when they analyze a farm loan: Does it cash flow? And what is the asset quality?"

While almost all agricultural loans are fully collateralized, according to Klein, uncertain cash flow can be a major impediment to assessing farm-operating loans. "Predictable farm program payments, including Federal crop insurance coverage, provide some protection. Ad hoc disaster payments can provide a reactive response to unpredictable weather or market crises; however, by being ad hoc, they have no ability to provide farmers with an assured guarantee of cash flow to use in assessing annual operating loans."

What the NCGA’s proposed counter-cyclical program does, the group says, is strengthen the farm safety net by providing a more predictable level of income. An added benefit of the program, Klein says, is that it would allow farmers to practice good stewardship or respond to high input costs, without concern of losing monetary benefits in times of low prices