LDPs have been around since the introduction of the Food, Agriculture, Conversation and Trade Act of 1990, but they were uncommon until about 1998, due to low commodity prices. Even now that their use is more common, producers still may find LDPs difficult to use to their advantage, said a University of Nebraska farm management specialist here. Using the LDP instead of the traditional nonrecourse loan can increase risk, said Roger Selley. If the market price doesn't rise after the LDP is secured the producer may receive less than the loan rate. To avoid the risk of the opposite happening, producers can take the LDP and sell their crop right away.
Producers also can still take out the traditional, nonrecourse loan that has less downside risk.
However, when a producer uses the LDP and prices rise, the profits would be greater. It all depends on the market and the producer's timing. Also, set a close-out date. If you don't reach your price goal by your close-out date, plan to sell anyway. The downside risk is still greater than taking a loan, but setting price objectives and executing according to plan can help reduce the risk.