This story was first featured in the November-December 2018 issue of Soybean Business. Click here to read the online version of the magazine.
For thousands of years, the cycle has held; farmers incur costs in the spring and reap the rewards in the fall. As long as 4,000 years ago, the Babylonian Code of Hammurabi limited interest on grain loans to 33.3 percent.
Loans remain a way for farmers to purchase land and equipment, recover from emergencies and fund their operations. For those who don’t qualify for private loans, the state and federal governments have myriad options.
They aren’t for everyone. And for those who qualify, there’s a tough row to hoe, with required education, loan oversight and, of course, plenty of paperwork.
But low interest rates — including a 1.5 percent rate on a growing program to help the next generation purchase a farm — are becoming more and more important in an environment of rising rates.
“The beginning farmer has additional start-up costs, so reduced interest rates make a big difference,” says FSA Acting Deputy Administrator for Farm Loan Programs Bill Cobb. “It can help a customer who could otherwise not have any options.”
Because there are no loan forgiveness options, each loan is a trade-off whose unique circumstances guide a farmer’s decision. But the rules to qualify aren’t as strict as you might think.
Who qualifies?
The rules differ from program-to-program, but the most important qualifications for the FSA’s loan programs include:
● A family farmer: This determination is made on a case-by-case basis. While there are no hard-and-fast size or residency requirements, a particularly large farm may be ineligible.
● Can’t obtain private-sector credit: The FSA exists to help people who can’t be helped from the private market. This is also a case-by-case determination made by loan officers.
● Have experience or training: There are fewer requirements for operating loans — typically some education, training or a year of experience — than for farm ownership loans. To get one of those, you have to have farmed for three of the past 10 years.
There are other, mostly standard rules — have satisfactory credit, be a citizen, don’t be delinquent on federal debt, etc.— but FSA loan programs tend not to have stringent criteria. A few programs have stricter requirements.
Loans and the new farmer
To a new farmer, the language of the field — the soil, the plants, the livestock — is a mother tongue. The lingo of the bank, of interest rates and amortizations, must be learned.
Part of that education often includes how loans, especially low-interest government credit, can be used to buy a farm.
The average age of the American farmer is 58 (the average Minnesota farmer is 55 years old) and young farmers often face major financial barriers in starting up. These programs are trying to help the next generation keep their traditions alive.
Let’s take an example that takes advantage of one of the Farm Service Agency’s most popular programs, the Direct Down Payment Farm Ownership Program. Even as the federal government saw a decline in loans made last fiscal year, this program increased by about 10 percent.
Let’s say you have a $665,000 farm to purchase, and you have the 5 percent down payment you need to qualify for this program. If you assemble a three-part loan package using the FSA, a private bank and the state rural finance authority — with current interest rates and standard terms for all three — financing costs would run you about $40,000 a year.
On the other hand, securing these three loans at market rates would cost more than a quarter more, or about $51,000 a year. For a new farmer, it could be the difference between a farm plan that works and one that doesn’t.
In it for the long run
Because government loans are intended for people whose finances prevent them from finding private-sector loans, their monitoring requirements tend to be more stringent. That’s why the FSA refers to its loans as “supervised credit.”
“It’s a lot of work, and people have to be prepared for it,” says Gary Lager, a financial officer at Compeer Financial, formerly AgStar Financial Services. “I’ve had some people wash out because they just weren’t willing to do it.”
While the hoops are intended to help the farmer be successful, the government is also interested in weeding out anyone who isn’t serious, FSA’s Cobb says.
“We want to make sure they have the tools to be successful before they’re committed to something that, maybe 18 months down the road, isn’t what they thought it was,” he says.
FSA loan officers ask plenty of questions and seek evidence to support the answers.
“If you say you’ve had X bushels per acre, there should be some documentation if you’ve been farming for the past three years,” Cobb says.
Some borrowers also require extra training in business operations, he said. It’s all part of a loan assessment that’s used to make a plan to help the client graduate to commercial credit.
The process also includes an annual operating plan with a projected cash flow to show the borrower can pay off their expenses. At the end of the year, that plan is consulted to see how well it lined up with what actually happened, Cobb says.
A loan, guaranteed
In some cases, a customer may almost qualify for a private loan, but a bank may be leery of lending. The FSA also guarantees loans, meaning it agrees to pay the lender most of the loan — usually 90 percent — if the lender can’t make the payments.
In these cases, it’s actually the bank that’s the FSA customer. But safeguards are in place to prevent banks from making unsound loans because they know there’s a safety net. Lenders have requirements to monitor the status of these loans.
Though loans to purchase a farm are some of the most popular programs, there are a wide variety of options.
Other loan options
The FSA has about a dozen loan programs addressing emergencies, operating expenses, land contracts and equipment purchases. Lager describes some of the differences:
Direct Operating Microloan: Often used by high schoolers who want to embark on a farming project in a 4-H club, FFA or a similar venture but aren’t old enough for a bank loan, these loans have a maximum of $5,000.
Guaranteed Operating: Typically written for five years, this loan is designed to be paid off and re-issued multiple times over the life of the deal. Because it’s a loan guarantee, banks can use this loan to extend credit to customers who might not qualify on their own merits.
Guaranteed Farm Ownership: Like the guaranteed operating loan, the benefit of this loan is less in the interest rate and more in allowing banks more flexibility on who they loan to. There is no down payment requirement and its term varies up to 40 years. This loan is sometimes used to refinance an existing debt.
Direct emergency: This loan can pay back 100 percent of actual losses to a maximum of $500,000, but is not commonly used in Minnesota for a few reasons. First, it requires a federal disaster declaration, so a loss for any other reason wouldn’t be covered. In addition, farmers need to produce at least one loan declinations — a letter from a bank declining to issue credit — in order to qualify. Finally, it requires a qualifying loss of 30 percent.
‘Invisible’ state partners
Like its counterparts across the country, Minnesota’s Rural Finance Authority offers loans. But in every case works directly with a bank, so borrowers are often only vaguely aware of their involvement. For the 45 percent of a loan it can finance, the RFA can typically offer a lower interest rate.
In September, the agency raised the rate on its beginning farmer program from 3 percent to 3.75 percent, says Ag Finance Supervisor Matt McDevitt.
One popular option for soybean farmers, though technically not through the RFA, is the Agricultural Best Management Practices Loan Program. Because nearly any farm spending can have a conservation element, this loan can be used for a wide variety of equipment, including no-till drills, manure spreaders, septic tanks and manure spreaders.
The program offers loans up to $200,000. It lends the money directly to banks at no interest, and caps the interest banks can charge at 3 percent.
“With interest rates rising, it’s a good deal,” McDevitt says. Last year, the agency disbursed $28 million in loans, about double the previous record.
Unlike the FSA, the state does have an asset limit, which is now at $816,800. People interested in an RFA loan should talk to a banker.