Cooperative Marketing Association Program:

Another way grain co-ops can serve their members

By Marc Warman and Alan D. Borst
Agricultural Economists
USDA Rural Business-Cooperative Service

Chris Kyer
Agricultural Program Specialist
USDA Farm Service Agency


rain marketing cooperatives can provide their members an important service by participating in USDA's Cooperative Marketing Association (CMA) program. Qualified cooperatives may obtain non-recourse marketing assistance loans and loan deficiency payments (LDPs) on behalf of their members. The CMA program uses Commodity Credit Corporation (CCC) funds and is administered by USDA's Farm Service Agency (FSA).

Participating cooperatives must meet certain eligibility requirements and follow specified operating procedures. Once designated a CMA, a cooperative may obtain marketing assistance loans or LDPs for any eligible members' qualified commodities covered by a marketing agreement.

Marketing Assistance Loan Program
Marketing assistance loans provide participating producers with interim financing after harvest, allowing them to use their crops as collateral. These are mostly non-recourse loans, which means CCC will accept ownership of the crop as repayment should the producer decide not to repay the loan during its 9-month term. However, a producer may repay the loan, reclaim tide to the commodity and sell it at prevailing market prices at any point during the term of the loan.

Producers have three loan repayment options. A producer may borrow money from CCC at the county loan rate and repay it at principal and interest or repay at the marketing assistance loan repayment rate. This rate is calculated by subtracting the posted county prices (for wheat, feedgrains and oilseeds) or the adjusted world price (for rice and cotton) from the loan rate to calculate the CCC-determined value. When this calculated rate drops below the original loan rate during the term of the loan, a producer may repay the loan at the lower rate and earn the market gain which is the difference between the repayment rate and the CCC-determined value.

For example, a producer obtains a marketing assistance loan for corn at $1.80 per bushel, the applicable county loan rate. With principal and interest, the producer will owe CCC $1.88 per bushel. If the producer decides to repay the loan on a day when the applicable county's repayment rate is $1.75 per bushel, the producer may redeem the loan at $1.75, thus saving 5 cents in principal ($1.80-$1.75 = $.05) and 8 cents in interest. The difference between the county loan rate and a lower repayment rate (in this example, 5 cents) is called the marketing loan gain.

Using commodity certificates is the third method of repayment. Producers can purchase commodity certificates at the repayment rate and immediately exchange the loan collateral with commodity certificates to redeem the loan. Commodity certificate exchanges are not subject to payment limitations.

Loan Deficiency Payments
LDPs are payments to producers who agree to forego a marketing assistance loan. The LDP payment rate is the difference between the county loan rate and posted county price or adjusted world price, as applicable. Thus, producers who decide not to take advantage of the commodity loan program have the same opportunity to receive marketing loan gains as producers who do. However, producers who obtain commodity loans can receive benefits other than marketing loan gains, such as having storage cost and interest expense forgiven.

Whenever the county repayment rate is below the county loan rate, producers can apply for LDP at their local FSA offices for that difference. For instance, if the county loan rate is $1.80 per bushel and the repayment rate is $1.75, the LDP would be 5 cents per bushel. After approval, producers can sell their crops or continue storage, but cannot get a commodity loan using the same grain as collateral.

A producer is eligible for either a loan or LDP on any given commodity, but not both. Producers are taking a risk when they apply for an LDP because the marketing gain may increase at a later date. And, a producer can only receive one LDP on a commodity of harvested crop.

Currently, most producers participate in the commodity loan and LDP programs through a local FSA office. An alternative is the CMA program. This allows qualified cooperatives to secure marketing assistance loans and LDPs for their eligible producer-members on commodities committed to the cooperative through marketing agreements. FSA allows grain and rice cooperatives and individual producers to follow the same administrative procedures. Thus, a cooperative with many eligible members will use the same paperwork as an individual farmer. After receiving the marketing assistance loan or LDP, the cooperative distributes the funds to its participating members. To make this even simpler, a federated CMA may obtain marketing assistance loans or LDPs on behalf of its member affiliate if they have been certified as CMAs by FSA.

The CMA program began in 1934 for cotton cooperatives. The list of eligible commodities has since been expanded to include barley, canola, corn, cotton, crambe, flaxseed, mohair, mustard seed, oats, rapeseed, sunflower, rice, saf-flower seed, sesame seed, sorghum, soybeans and wheat. Cotton and rice cooperatives have used this program more extensively than those marketing other eligible grains and oilseeds. Grain and oilseed cooperatives have not used CMA as much because of the complexity of the certification requirements and historically high market prices compared to county loan rates.

However, the CMA program was recently amended to make it more accessible and attractive to cooperatives marketing other eligible commodities. With these changes and the increased demand for marketing assistance loans and LDPs from their grower members (due to lower grain prices and the weaker farm safety net), grain cooperatives have a greater incentive to participate in the CMA program. Program participation has increased in recent years from both newly certified cooperatives and those long designated as a CMA. Currently, 28 out of the 47 approved CMAs are grain marketing cooperatives.

Eligibility requirements
Cooperatives must meet five basic eligibility requirements to be certified as a CMA. Three of the factors are set to ensure the cooperative is, in fact, operating as a cooperative (see below). A financial requirement is included to ensure the cooperative has the liquidity to operate securely. Finally, a cooperative must have marketing agreements with members who want to receive marketing assistance loans or LDPs. The CMA must be owned and controlled by active grower-members and provide evidence that this is the case. A majority of directors must also be active members of the cooperative. A CMA may not provide marketing assistance loans or LDPs to non-members who are marketing through the cooperative.

A cooperative not owned and controlled by its active members may still apply for certification and be conditionally approved by FSA under certain conditions. These cooperatives must demonstrate that they can, and will, vest ownership and control in active members by retiring the equity of inactive members, or by obtaining new members, usually within 1 year. Cooperative applicants must provide FSA with documented proof that they admit every membership applicant who is eligible under the cooperative's articles of incorporation. This confirms that the cooperative is not discriminating against a particular individual or group. However, a cooperative may refuse membership to an applicant whose admission could potentially undermine the cooperative's operations. Open membership is presumed until relevant information is provided from a person who was prevented from joining the cooperative.

At least 50 percent of a crop of an authorized commodity delivered to a CMA for marketing must be produced by its members to obtain marketing assistance loans or LDPs. FSA may waive this requirement for up to 2 years if the applicant can prove that such authorization is necessary for the efficient operation of the cooperative and that its FSA approved plan will bring it into compliance with program rules.

Under the CMA program, a cooperative must maintain a certain level of liquidity for making advances to its members and of marketing its commodities (you can't market without cash). A current ratio of at least $1 of current assets for each $1 of current liabilities is the required level of liquidity. The balance sheet a cooperative submits to FSA with its application is the source of proof.

Finally, a CMA must sign a uniform marketing agreement with each member who delivers a commodity to a marketing pool. (A loan pool is any CMA pool containing the commodity used as collateral by the CMA to obtain either marketing assistance loans or LDPs) The identification number used by the member to report acreage on applicable forms to FSA must appear on the agreement. These agreements give CMAs the authority to pledge the commodity as collateral for a marketing assistance loan, to place a lien on such commodity and to market the commodity on behalf of their members.

Cooperatives may offer seasonal or specific pricing pools to their eligible members. In specific pricing pools, individual members retain the right to determine the price at which the commodity will be sold. In seasonal pools, the cooperative markets the pooled commodity and determines the price at which it will be sold. FSA is not concerned with the structure of the pools, only that the member receives the loan or LDP proceeds.

Application process
To become a CMA, a cooperative must submit an application with the following information for approval to FSA:

The CMA must be recertified each year and provide the following information: FSA can require a CMA to submit a new initial application instead of a recertification application if it has questions on whether the CMA is operating according to documents previously submitted.

Approval
If a cooperative is successful, FSA will provide written conditional or unconditional approval of the application. If the applicant meets all the discussed requirements, unconditional approval is granted for 1 year. If an applicant is in substantial but not total compliance with the requirements, FSA may provide conditional approval. An example would be a cooperative that had only 49 percent member business during the past year, but normally member business is much higher. The CMA must then come into full compliance within a period of time specified (usually a year) in the conditional approval notification.

A CMA can be suspended from participating in the marketing assistance loan and LDP programs if the cooperative has not operated according to its application or its last recertification, complied with all applicable regulations, corrected any deficiencies as noted by FSA or violated any of its agreements with FSA. A suspension is normally lifted after the cooperative has made the necessary changes. If a suspension is not lifted within 1 year, the CMA's certification automatically terminates. If it does not have any marketing assistance loans outstanding, a CMA may voluntarily terminate its participation in the marketing assistance loan and LDP programs through written notice to CCC.

FSA may call in all outstanding marketing assistance loans made to a suspended or terminated CMA. Commodities pledged as collateral for marketing assistance loans must be redeemed by a specified date. If not, title to the commodity transfers to CCC, which will have no obligation to pay the commodity's market value above the principal amount of such loans.

Operating procedures
Once a cooperative is certified as a CMA, it must follow certain procedures to ensure proper operation of the marketing assistance loan and LDP programs. For example, CMAs can establish separate pools as needed for the various eligible commodities. Marketing assistance loans or LDPs will be available to CMAs for any eligible commodity in a loan pool under these conditions: The first is when a CMA inadvertently included ineligible quantities based on grade, quality, or other factors. Secondly, if there are eligibility discrepancies within FSA records, the producer has certified to the CMA that the commodity is eligible for a marketing assistance loan, and there is no market gain or LDP involved in the marketing pool for the crop year.

CMAs are required to monitor market gains they receive on behalf of their members and to ensure that marketing gains for members do not exceed their payment limitation. Again, a marketing gain is the difference between the loan rate and a lower marketing assistance loan repayment rate due to a decline in the commodity's price. Marketing gains are treated as direct government payments. Producers are normally subject to a $75,000 per-person, per-crop-year payment limit on these gains. The payment limitation for crop years 1999 and 2000 was increased to $150,000.

CMAs are also required to maintain inventories of each class and grade of grain at least equal to the quantity pledged as loan collateral. A CMA must have identity-preserved marketing pool commodities stored in approved warehouses while the commodities are pledged as collateral for marketing assistance loans. Marketing assistance loan eligibility for commingled commodities stored on a farm or in a warehouse may be transferred to an approved warehouse. Marketing assistance loans will be available to the CMA for the quantity of farm-stored commodity that is part of the CMAs loan pool. This will be specified in the CMAs marketing agreements with those members who store on-farm.

Commodities pledged as collateral for CCC loans have to be free of all liens and encumbrances and the cooperative is not allowed to take any action to cause a lien or encumbrance to be placed on a commodity after a marketing assistance loan is approved. The cooperative is responsible to CCC for pledged as collateral for marketing assistance loans or used to obtain LDPs. This will occur when the CMA fails to comply with FSA regulations, there are changes in the quantity or quality of the pledged commodities, or liens are imposed on either the CMAs or its members' financial agreements.

A CMA cannot apply marketing losses from a commodity not used as collateral against the marketing proceeds of a commodity that is used. And it cannot carry forward losses from one loan pool and apply them against a subsequent loan pool without FSA authorization. This may occur if carrying forward the loss complies with FSA's marketing assistance loan and LDP program intent.


If FSA makes marketing assistance loans or LDPs for any grain in a marketing pool, the money will be distributed to pool participants based on the quantity and quality of the commodity delivered by each member, less any authorized charges for services performed or paid by the CMA necessary to condition or make the commodity eligible for marketing assistance loans or LDPs. This includes storage and administrative fees. Payments need to be delivered within 15 days from the date the CMA receives marketing assistance loan or LDP money from FSA, except when marketing assistance loans are redeemed within 15 work days of the date of disbursement of the marketing assistance loan.

With one exception, loan pool payments cannot be combined with non-loan pool payments and the CMA must distibute loan funds according to information given to FSA during the approval process. However, sales proceeds from a loan pool may be combined with those from other pools if the proceeds from such pools are allocated among the pools according to the quantity and quality of the commodity included in the pools.

CMAs need to maintain records for each marketing assistance loan or LDP commodity, showing the quantity received from each member and nonmember as well as the quantity eligible for marketing assistance loans and LDPs. They also have to maincommodity as specified in the applicable commodity regulations. Finally, CMAs need to maintain records on their unprocessed inventory broken down by the above three items.

Inventory needs to be allocated until the entire loan pool is depleted. For processed commodities, the pool's inventory must be adjusted when the commodity is withdrawn for processing. For non-processed commodities, the pool's inventory has to be allocated to the pool and then adjusted when the commodity is shipped. If a marketing assistance loan or LDP is obtained for any quantity in a loan pool, allocation of costs and expenses must be made according to generally accepted accounting principles.

The books, documents, papers and records of the CMA and subsidiaries must be maintained for 5 years after the applicable crop year. FSA has the right to examine all books, documents and papers to verify whether the CMA is operating or has operated appropriately.

While somewhat complicated, the CMA program provides cooperatives another way to serve their members. The eligibility requirements for partici pation are simple, and well-managed grain cooperatives should have no problem qualifying. Cooperatives interested in becoming a CMA can request an application packet by writing to: Director, USDA-FSA Price Support Division, 1400 Independence Avenue, SW, Stop 0512, Washington, DC 20250-0512, (202) 720-7935



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