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Credit For Start-Up Farmers

We all know that many farmers don’t retire. One reason some give is that young people aren’t attracted to the hard work.

Don’t tell that to Alison and Jim Deutsch of Osseo, Wisconsin. Neither one grew up on a farm. They spent 10 years looking for land to rent before starting a hog operation in 2007. By 2010, they were able to buy 160 acres from retiring dairy farmers, only to have their first corn crop hailed out. A mediocre year was followed by two years of drought. Yet, they’re still going, building a business that sells meat to consumers as far away as Milwaukee and pork to upscale Niman Ranch.

Don’t tell that to Dave and Annette Hill, either. Dave did grow up on a farm near Rushford, Minnesota, but, as he puts it, “I graduated in the mid-1980s, and there really wasn’t an opportunity for me.” He became an electrical engineer, working for IBM in Rochester. One day, he visited a nearby farmers market, talking to a beef producer who was living comfortably on 80 acres selling directly to consumers. From the farmer’s prices, “I figured out, holy smokes, this guy is grossing five grand an animal,” he recalls. 

The FSA helping hand to beginners

Dave saw an opening. He, too, could start raising beef for direct sales. He found a farm for sale 5 miles from his parents. With a good job and his farm background, “I arrogantly thought I’d have no problem getting a loan,” he recalls. 

When he applied at AgStar, a Farm Credit System lender, he was told he needed a bigger down payment and his debt-to-asset ratio was too low. “I didn’t own enough stuff,” he says. He contacted several banks. “They never got back to me; they didn’t even call,” he says. 

Eventually, the Hills moved to Holy Cross, Iowa, and rented land that had been in Annette’s family. Three years later, they got a beginning farmer loan from USDA’s Farm Service Agency (FSA) to buy the 150-acre crop and hay farm.

“Without the beginning farmer program, we wouldn’t have been able to get a loan,” Hill says. 

The Hills and the Deutsches are FSA beginning farmer loan borrowers. 

FSA beginning farmer programs got some improvements in the new farm bill. They’re often the only way young farmers with modest resources can start owning land. Banks do make beginning farmer loans. They’re the biggest partners in one FSA program, beginning farmer down payment loans. The Farm Credit System loans almost seven times as much to farmers with less than 10 years experience, the USDA definition of a beginner. (USDA has no age cutoff.) 

Yet, FSA remains, as the agency calls it, the “Agricultural Lender of First Opportunity.”

New and improved

For years, the National Sustainable Agriculture Coalition worked to improve FSA services to young farmers, getting USDA to devote a large share of FSA loans to beginning farmers and ranchers. 

Ferd Hoefner, the group’s policy director, describes new improvements. The farm bill makes permanent a microloan program – seven-year term loans of up to $50,000 for livestock, equipment, and operating costs. It raises the total value for farm ownership down payment loans to $666,000, which works out to $300,000 loans from FSA. The starting farmer must put down 5% of the purchase price, FSA covers 45%, and a lender (bank or Farm Credit) provides 50%.

“Even with a 5% share, your chances of success are dramatically improved,” Hoefner says.

Down payment loans also have the lowest interest rate on the FSA share, currently 1.5%. 

Hoefner is also pleased that USDA is asking for a big boost in funding for FSA in the president’s 2015 budget, $1.5 billion for direct farm ownership loans. “It’s almost triple the current funding level,” he says. Presidential budgets usually die in Congress, but Hoefner thinks there’s a good chance of some increase for FSA loans.

The farm bill itself does not fund FSA lending. Congress does that annually, says Jim Radintz, USDA’s assistant deputy administrator for farm loan programs in Washington, D.C. “Congress has reserved, by law, a substantial portion of funding for beginning farmers, particularly in the direct programs,” he says. “In the direct farm ownership (real estate purchase) program, 75% of the funds are reserved for beginning farmers for the first 11 months of the fiscal year.” Half of direct operating loan funds are reserved for beginning farmers for the first 11 months. FSA also guarantees loans from commercial lenders, with 40% held for beginning farmers for the first six months. All this gives start-up operations an edge on limited funds, he says.

Tips for success before and after a loan

FSA requires young borrowers to have three years of experience that includes some management before buying a farm, says David Manley, a farm loan specialist at the Minnesota state FSA office in St. Paul. “If you’ve grown up on a farm or have some experience, you can get an operating loan,” he says. FSA also usually requires beginners to take classes in farm financial planning, such as those offered at community colleges.

Amy Bacigalupo, director for the Land Stewardship Project’s Farm Beginnings program in Minnesota, says young farmers often focus on acquiring land, but “the best choice might be to wait a year or two until you have a sense of your business.” The LSP Farm Beginnings program provides year-long training sessions on management and links participants to established farmers who act as mentors and sometimes provide work experience.

One disadvantage to FSA land loans is the time needed for processing and the potential to run out of funds. Jim and Alison Deutsch, who went through Farm Beginnings, were prepared. “We had everything lined up before we found the farm, so it went fairly smoothly,” Jim says. “It does take some time. We had probably two to three months of paperwork.”

Even beginners can’t be novices, adds Alison.

“You pretty much have to have an established business going – an income-generating business – or they’re not going to waste their time,” she says.

Having realistic projections for that business is key, adds Aimee Finley, a starting dairy farmer and farm business management instructor with Western Technical College in La Crosse, Wisconsin. It’s more than numbers, though.

“Know yourself, know your strengths and weaknesses,” she says. Get help where you don’t have expertise.

Dave Hill couldn’t agree more. Neighbors help, and his father and Annette’s foster brother, a machinery dealer mechanic, keep his old equipment going. “It’s not minor things those guys do to help me,” he says. “They’re irreplaceable.”

FSA loans aren’t for everyone. You must be ineligible for commercial credit. Size restrictions apply to land loans.

Other paths ahead

For other young farmers, banks and the Farm Credit System are making loans. In 2013, the Farm Credit System made $11.1 billion in loans and commitments to 73,902 young and beginning farmers, says Gary Matteson, head of the Young, Beginning and Small Farmer program for the Farm Credit Council. “Each of 79 associations has some kind of program for beginning farmers,” he says.

USDA also has other programs for beginners beyond FSA loans, says Bacigalupo. FSA is a good place to start. Finley agrees. “Most of the FSA lenders I work with are great people,” she says. 

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