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Experiment with contract guarantees is off to a slow start

Agriculture.com Staff 07/07/2010 @ 9:08am

Traditionally, land sold to beginning farmers has often been sold using a contract for deed. The seller is the banker, which sometimes allows parents or older relatives to sell land to a young buyer who can't come up with a big down payment and who might need slightly more favorable terms. For the seller there can also be some tax advantages.

Last September the USDA's Farm Service Agency rolled out a new program to guarantee a couple years of payments if a young farmer temporarily falls behind on a land contract. The program is a pilot project in six states and was authorized by the 2002 Farm Bill.

It's a small program. FSA can guarantee only five contracts in each of the pilot states in a year. But so far, even that is more than the demand. It has been offered in Indiana, Iowa, North Dakota, Pennsylvania, Oregon and Wisconsin.

"We've had very few inquiries, to be honest with you," says Chris Beyerhelm, The few we've had have fallen through," Chief Program Specialist for farm loans at the Iowa FSA office.

He's a little mystified at the lack of interest. "There's no downside at all," he says. "As long as a dad is going to sell to a son, why not get a two-year guarantee of payments?"

Beyerhelm says some people have had reservations about a requirement that contract payments have to go to an escrow account run by a bank. But banks contacted by his agency in Iowa have said they would charge between $150 and $300 a year to handle an escrow account, a relatively modest fee.

Brent Kerns, Beyerhelm's counterpart in Indiana, says his staff has gotten some complaints about the escrow requirement, too. But buyers should be interested in the escrow requirement, especially if they're buying from an unrelated seller, because the escrow agent holds the deed. In one case, not involving this program, an FSA borrower improperly resold his farm with a contract for deed. When the seller fell behind on his payments to FSA, he still owed $200,000 on that note. The contract buyer had paid $90,000 over 11 years. "Basically, that buyer lost $100,000," Kerns says.

Kerns says that sellers in Indiana who use contracts also prefer to sell over 3 to 5 years and then have the buyer refinanance, instead of selling over 10 years under the FSA contract guarantee program.

Ferd Hoefner, a Washington lobbyist for the Sustainable Agriculture Coalition, which backed putting the contract guarantee experiment in the farm bill, says he thinks the FSA has tried to make the program workable.

"I think they've done a very credible job of coming up with a program that sounds like it should be helpful," Hoefner says. "We would like to see it extended to other states."

Nancy Thompson, a Des Moines Iowa attorney who specializes in agricultural law, says that the USDA didn't have a lot of money to promote the program. "I think, looking back now, we probably should have done a ton of publicity at the start," she says. Still, FSA has done what it can to promote the new program. Charles Marshall at Pennsylvania's FSA office says he's gotten the word out through that state's Farm Bureau and a program that works with young farmers, Pennsylvania Farm Link.

And the Wisconsin and Oregon FSA have put details about the program in prominent spots on their web pages.

Bob Bonnet, Branch Chief for guaranteed loan making with FSA in Washington, says his agency is willing to make changes in the guarantee program if that will help increase participation. "If we can identify what the limitations are, we certainly would. That's what pilots are for."

Here is a brief summary of how the program works prepared by Ferd Hoefner:

Qualified beginning farmers and ranchers have farmed for at least 3 years but not more than10 years, materially and substantially participate in the operation, including day-to-day labor and management, and do not own land greater than 30% of county average farm size. The federal guarantee will only be provided on new contracts, not existing ones. The guarantee will be in effect for 10 years, and will cover, in the case of non-payment by the buyer, two annual installments plus two years of taxes and insurance, or up to the amount of money represented by two annual installments plus taxes and insurance. The interest rate for the 10 years of the guarantee may not exceed the FSA direct farm ownership interest rate plus 3%, and the loan must be amortized for a minimum of 20 years. Commercial lenders or other third parties will serve as escrow agents for the loan.

For an analysis of the program given at an agricultural law conference last November click on the link below.

And visit the Oregon FSA home page, which has more information on the program.

What do you think of this program? Let us know how you'd change it. Would you use it as a seller or buyer? Would you like to see it offered in your state?

E-mail Dan at dan.looker@meredith.com

Traditionally, land sold to beginning farmers has often been sold using a contract for deed. The seller is the banker, which sometimes allows parents or older relatives to sell land to a young buyer who can't come up with a big down payment and who might need slightly more favorable terms. For the seller there can also be some tax advantages.

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