Cash Flow Options for Wool Growers

Given the troubled world economy, which is affecting consumer buying habits, clothing purchases are not exempt. The wool market, so far this season, is slower; however, if producers decide not to sell their clip at shearing time, there is an option to help with cash flow this spring. Producers can request a marketing assistance loan rather than the loan deficiency payment that most have taken advantage of since the program was created in 2002.

The loan option provides interim financing for producers after shearing to meet cash flow needs without having to sell the wool. If producers wish to watch the market for awhile yet need revenue for spring bills, contacting your local Farm Service Agency (FSA) office for loan information may be worth considering.

Marketing assistance loans are 9-month, non-recourse loans in which the wool is pledged as loan collateral. Marketing loans also provide additional risk management for sheep producers as the loan can be repaid with principle and interest at any time allowing the wool to be sold on the market or, if the market falls during the loan period, a buyback formula may allow the loan to be repaid at less than the loan rate received.

"Producers can watch the market and if it rises, sell the wool and pay off the loan, or if the market falls, the buy-back rate that is pegged to the wool market should provide a better payoff than the loan rate," stated Glen Fisher, American Sheep Industry Association (ASI) president. "Producers do have the option of delivering the pledged collateral to the Commodity Credit Corporation (CCC) as full payment for the loan at maturity."

Alternatively, loan deficiency payment (LDP) provisions specify that, in lieu of securing a loan, producers may elect to receive an LDP. In the past, nearly all producers have opted for the ungraded LDP.

"If a producer is not planning to sell the wool at shearing time, a loan may be an excellent way to keep the cash flow positive," commented Peter Orwick, executive director for ASI. "A core test showing micron and yield is necessary to determine the loan rate for the wool as well as the pounds to secure the loan. The loan rates, as published by FSA, are expressed on a clean basis."

"If contemplating delivery of wool as settlement for a marketing assistance loan at maturity, producers need to realize they pay the inspection fee and they are subject to discounts if short on any number of quality and preparation factors, so it is important to talk with your FSA office about these topics as well," concluded Fisher.

Additional information is available at www.fsa.usda.gov/FSA/newsReleases?area=newsroom&subject=landing&topic=pfs&newstype=prfactsheet&type=detail&item=pf_20070601_farln_en_nonrecmkt.html or by contacting the local FSA office.