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New help for start-ups

It was almost like a dream. It came to Katie Ives just before she awoke. And when her husband, Alex, walked in the door for breakfast after morning chores, she blurted it out.

"Ice cream! Ice cream!"

It was the answer to weeks of thinking, praying, and trying to come up with a new enterprise to diversify their sixth-generation dairy farm near Norwich, New York.

The farm, an 80-cow dairy with a busy custom cropping operation, already supports Alex, his father, and a cousin and his family. Alex and Katie's three sons will be its seventh generation. It's getting a bit crowded.

So Katie and Alex have started a new business, Ives Cream, a main street ice cream store in Norwich. Every other week Alex trucks milk to a processing plant where it's made into chocolate and plain base mixes. The mixes go to the store, where the family makes their own flavors.

"The successful farmers these days are the ones who are diversifying," Katie explains in her store, as she waits on a customer who ponders between a milk-and-honey cone or a maple-walnut cone.

Family dairies that sell their own milk, cheese, or even ice cream aren't unheard of these days. What sets the Ives family's business apart is that they have a $50,000 loan from a new program for young farmers started by First Pioneer Farm Credit ACA, a Farm Credit System lender in the Northeast, and CoBank, the system's lender to cooperatives. Each lender committed up to $1 million to a seed capital program, FarmStart, LLP.

FarmStart can make loans to beginning farmers that wouldn't meet Farm Credit System members' internal credit standards.

It's almost like venture capital. FarmStart doesn't actually own a stake in these new businesses, as a true venture capitalist would. But it requires no down payment or equity for five-year loans up to $50,000 -- if the business cash flows and seems to have a good chance of succeeding.

"It really is a bet as to whether or not we think these people are going to be survivors and whether we want to make an investment in their operation," says Michael O'Connor, senior vice president and general counsel at First Pioneer's headquarters in Enfield, Connecticut.

The loans are nonrecourse subordinated debt, with personal property as collateral. "This structure is about as close to an equity investment as you can get," O'Connor says.

The goal with each loan is to graduate the borrower to more conventional loans with First Pioneer in five years or less.

So far, FarmStart is a long ways from using up the combined $2 million commitment of its founders. Besides the ice cream business for the Iveses' dairy farm, FarmStart is backing a goat-cheese operation started from scratch, a pick-your-own apple orchard, a vegetable stand, and a tomato transplant business.

"Agriculture is evolving in the Northeast and changing," O'Connor says. "We want to be there encouraging that. These are going to be new and different operations that conventional agriculture might not want to lend to."

FarmStart's new ventures may be low equity, but they must have a good business plan. As a FarmStart flier puts it, "We're looking for substance, not fluff. The business plan needs to be a productive exercise for the new business owner and demonstrate to FarmStart that he/she will have the ability to successfully use the investment."

For the Iveses, that's an attractive benefit. Katie and Alex had already started their business with a line of bank credit and a credit card before switching to FarmStart. FarmStart's interest rate, the prime rate of about 7.75%, is certainly better than the old credit card debt. But what really appeals to Katie is FarmStart’s help with its required monthly cash flow analysis.

"FarmStart will help us with tracking how much one scoop of ice cream costs," she says.

Adds her FarmStart loan officer, Marianne Moody, "We provide records and software support as part of a bundle of services." Fees run from $50 to $150 per hour.

The Iveses' loan consists of $35,000 in working capital and $15,000 in a line of credit for the slow winter months. They don't have to make payments during those slow months. That flexibility is another advantage for start-ups.

The Iveses are well on track to repaying the loan, even with that flexibility. And they were already borrowers from First Pioneer for their share of the family's dairy farm business. Alex is gradually buying out his father's interest in the dairy.

Katie's ice cream venture is aimed at providing a possible business for their sons. And, she confides, she has a dream of owning a beach house.

So far, FarmStart is the only program of its kind in the national Farm Credit System.

It's one that appeals to Nancy Pellett, chairwoman of the Farm Credit Administration, the federal regulator of the Farm Credit System.

"I am pretty excited about this. It's taken them a little while to get it going," says Pellett, who is from a family-run livestock and crop farm at Atlantic, Iowa. "I have young farmers in my family, so I know their struggles. This is the right thing to do."

Unlike other lenders, the Farm Credit System is mandated by Congress to provide "sound and constructive credit" to young, beginning, and small (YBS) farmers. Improving that mission has been a goal of Pellett's since she was appointed to the FCA board by President Bush.

Last August the FCA board issued an interpretation of its rules that encourages Farm Credit System lenders to consider "setting aside capital that they are willing to put at risk to support programs that meet the credit needs of these YBS farmers."

Josh Baitinger, 27, of Bridgeton, New Jersey, is another good candidate for Farm Credit's increased interest in moving young people into full-time farming. He grew up in a five-generation farming family that has grown tomatoes since his grandfather tried the crop. But he was working in a medical supply warehouse until a chance came up to buy his uncle's tomato transplant business that supplied six growers.

"He made a last-minute decision to retire and all of these people needed plants," Baitinger says.

So about a year ago, he borrowed $350,000 to take over the business. That includes $300,000 from First Pioneer to buy four greenhouses and 6 acres. A $50,000 FarmStart loan paid for equipment and working capital. "It's a principal-free loan for five years," he says.

He likes that flexibility, but he's not living it up. Baitinger also rents about 220 acres and shares a tractor with his father to raise his own tomatoes sold on contract to a processor. He's ahead on repaying his loans.

"He's paid over schedule on his mortgage and some of his capital items, which is nice to see," says his loan officer, Reese Crowe. "He's very hard working, and he's very conservative in his spending."

Baitinger seems equally pleased. "They're good people to work with. I would recommend them," he says.

Adds Katie Ives, "Knowing how conservative Farm Credit tends to be, it is always helpful to have somebody believe in you and your idea."

It was almost like a dream. It came to Katie Ives just before she awoke. And when her husband, Alex, walked in the door for breakfast after morning chores, she blurted it out.

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