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Financial resources for beginning farmers

Erica Louder for Progressive Forage Grower Published on 01 March 2016
Finance 101

The average age of a farmer in the U.S. is 58. This means that half of our farmers are within a couple years of retirement or are already past retirement age. The other half of farmers spans a 40-year age gap.

The average age has increased for the past 30 years and it continues to increase as fewer and fewer young people choose production agriculture as an occupation. The industry is in desperate need of energetic, young producers that will embrace agricultural developments. However, it remains harder than ever for a new producer to get a start.

Minnesota farmer, Andy Pulk is no stranger to this fact. As a first-generation farmer, getting into production agricultural was no walk in the park. Ten years ago he started farming part-time through some cash leases and custom work.

Through what he describes as “sweat equity” he was able to transition into full-time farming. Today he farms 3,700 acres in northwest Minnesota.

A contemporary of Pulk, Evan Grandstand in northwest Minnesota, is working towards that goal of full-time farming but maintains employment at as a crop consultant while farming 520 acres on the side.

Both men have sacrificed as they have grown their operations and have had their own struggles as new farmers. Pulk says, “For me, the largest hurdle was first obtaining financing and the second was access to land. When I moved my family to northwest Minnesota to take advantage of some large lease opportunities, I solved the land problem but I still needed to work out the financing.” He says, “When we moved we were also seeking a home. Yes, we moved to farm but for us it was deeper than that. We wanted to find a place to raise our family.”

When first beginning, Grandstand also worried about obtaining an operating line for his growing operation. His concern stemmed from a general uneasiness about borrowing money and if he could be approved for a loan with a lack of credit history.

Like Pulk and Grandstand, financing is often the largest obstacle to new producers. Hopeful farmers often lack the capital required for land, equipment or livestock purchases. Without balance sheets or family farms, first-generation farmers have very limited financing resources. Banks are simply unwilling to take the risks associated with ag lending to an unproven producer. However, there are resources available if the new producer is willing to look.

Farm Service Agency (FSA) has farm loan programs available to young, beginning and socially disadvantaged (SDA*) farmers. These loans come with low interest rates, long repayment periods, without fees and are approved even with weak financial ratios. The programs offered are broken into three categories: direct loan programs, guaranteed loan programs and land contract guarantees.

1. Direct loan programs – These loans are originated by FSA and are either stand-alone or work in conjunction with another lender. They can be used to purchase land, equipment, livestock, make improvements, fund conservation efforts or for operating expenses.

The maximum amount leant by FSA is $300,000. These loans come in several ways: down payment loans, joint financing loans, microloans, term loans and operating loans. Direct loans are often used in conjunction with another lender to purchase real estate. They work very well for a farmer that is just starting an operation.

2. Guaranteed loan programs – These loans are operating and real estate loans that are originated at a commercial bank or a Farm Credit association. The bank will originate the loan and then request a loan guarantee from the FSA for up to 90 percent of the principal balance.

FSA will guarantee up to $1,399,000. This is a great program for an operator who needs to begin working with a traditional ag lender but doesn’t have the financial strength to qualify on a stand-alone basis. The bank is often more willing to loosen their guidelines, as they are guaranteed repayment in the case of a default.

3. Land contract guarantee – This program is designed for retiring farmers selling their land to new operators on a contract basis. It works one of two ways: it will guarantee up to 90 percent of the current outstanding principal balance or it will guarantee up to three amortized annual payments.

This program is perfect for farmers who would like to see their farms sold to a beginning operator, but would like some security of repayment.

Pulk and Grandstand both used FSA loans to get their start; while both farmers primarily lease their farm ground, they have taken advantage of the operating lines and term equipment loans.

In Pulk’s quest, he stumbled onto the FSA website and then got in touch with the local FSA office. From there his first operating line was originated. Grandstand obtained an operating loan at a local bank, but when it came time for some equipment purchases, he turned to FSA.

For him, the important part about working with FSA was the positive feedback he received as he completed his loan applications. Grandstand says, “It wasn’t just the low interest rates that were important to me. They gave me confirmations that I was paying fair prices for my equipment and listened to me as I expressed a desire to purchase precision ag technology.”

Outside of FSA, some agricultural lenders have programs specifically designed for the new farmer. These programs often work in conjunction with FSA. Like FSA, they often offer lower interest rates and have looser underwriting guidelines. They are designed to meet the needs of the young producer.

As a government sponsored enterprise, the Farm Credit System is required to maintain a program specifically for young, beginning and small producers. These programs are tagged YBS. Each association creates their YBS program based on the needs of the operators in their territory. They work alongside FSA or can stand alone to structure loans that are suited for the new operator.

Often that means smaller down payments, longer repayment terms, higher advance rates and looser financial ratios.

In the beginning, FSA provides solid programs for new farmers to get their starts. That may mean buying their first 40 acres or their first 40 cows. FSA’s farm loan officers don’t just originate loans, they tutor new producers in balance sheets, budgets and business plans.

This tutorage helps guarantee the long-term success of that producer. However, FSA is not designed to be a lifetime lender. Their ultimate goal is to get that producer in a position to begin a relationship with another ag lender. Farm Credit System’s YBS program provides a channel to make that transition.

As Pulk’s farm grew, his operation followed that path. He graduated from a direct FSA operating line to an FSA-guaranteed operating line that was originated by his local bank. He credits his farm loan officer for tutoring him on a farm budget. That understanding is something that Pulk wished he knew when he started.

Speaking of conversations with other young producers, Pulk says “You will always make mistakes, but just don’t make mistakes big enough to bite your head off.” That piece of advice is particularly relevant as the agricultural industry is entering a time of down markets.

“Regardless of the demographics or locations, new producers fight the same battles,” Pulk says. “Those battles are three-fold: first, access to capital; second, access to land; and third, access to labor.” Grandstand echoes this sentiment as he speaks of the importance of the relationship with his loan officer as he struggled through a particularly wet spring last year.

Like many things in agriculture, agricultural lending should be relationship based. As agricultural markets ebb and flow, producers (and particularly young producers) need flexibility to ride the changes and grow their operations.

Ultimately, the growth needed in agriculture to support a growing population must come from a younger generation of producers. Using FSA and then developing a strong relationship with a loan officer will help our young farmers start and grow productive operations.  FG

*An SDA farmer or rancher is a group whose members have been subject to racial, ethnic or gender prejudice because of their identity as members of a group without regard to their individual qualities.

These groups consist of American Indians or Alaskan Natives, Asians, Blacks, or African Americans, Native Hawaiians or other Pacific Islanders, Hispanics or women. (Definition from the Farm Service Agency)

Erica Louder is a freelance writer based in Idaho.

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