Using creative financing to purchase agricultural land
November 19, 2012
Finding the perfect property is the first step in farming and ranching. This process takes time. Once the property is found, the purchaser will know deep down that it's "the one." However, financing this property can be a headache, and may come with many challenges. Without knowledge of the funding available, potential purchasers may miss out on their dream property.
"While producers have been able to increase their bottom line over recent years, startup costs are often high to enter the agriculture sector. Land costs, equipment and other expenses to purchase or operate a farm can quickly add up and many simply don't have access to the commercial credit necessary to get started," said Agriculture Secretary Tom Vilsack in a news release.
He continued, "The prosperity of our agriculture sector is driving the economy forward, creating jobs, and ensuring that Americans have the most affordable food supply of any developed nation. At USDA, we're committed to supporting the farmers and ranchers who are creating this success."
Luckily for agricultural producers, there are several programs available to help farmers and ranchers get the financing they need to make their dreams come true.
“We still run things on good old fashioned customer service. A lot of the reason why we can compete with bigger feed stores is because we treat people how they want to be treated, and they come back because of that.”
~ Danielle Nater, daughter of Dennis Nater, owner and operator of Northern Colorado Feeder’s Supply
The Farm Service Agency, which is run through the U.S. Department of Agriculture, has several programs to help farmers and ranchers with financing.
"FSA wants you to succeed," said Trudy Kareus, State Executive Director of the Farm Service Agency (FSA) in Colorado. "Not only do we offer low rates, but our Farm Loan Managers and Officers offer farm planning and counseling, supervised credit and assistance, and sustained financial planning services throughout the life of a direct loan."
The FSA has provided more than 128,000 loans since 2009, and those loans total nearly 18 million dollars.
Beginning Farmers and Ranchers
One of the programs that the FSA offers is the Beginning Farmer and Rancher loan.
"One issue that is always critical for farmers and ranchers is access to credit — in particular for those who are just starting out or who have smaller farming operations," said Vilsack.
According to the USDA, "The U.S. Department of Agriculture's Farm Service Agency makes and guarantees loans to beginning farmers who are unable to obtain financing from commercial lenders. Each fiscal year, the Agency targets a portion of its direct and guaranteed farm ownership and operating loan funds to beginning farmers."
A beginning farmer is an individual or entity who has not operated a farm for more than 10 years, meets the loan substantially eligibility requirements of the program to which he/she is applying, participates in the operation, and does not own a farm greater than 30 percent of the median size farm in the county. If the applicant is an entity, all members must be related by blood or marriage, and all members in a corporation must be eligible beginning farmers.
The number of loans to beginning farmers and ranchers has increased from 11,000 loans in 2008, to 15,000 loans in 2011. According to the USDA, more than 40 percent of their farm loans now go to beginning farmers.
Socially Disadvantaged Farmers and Ranchers Loan
There is also a program in place for those farmers and ranchers who are considered to be socially disadvantaged. FSA defines a socially disadvantaged person as one of a group whose members have been subjected to racial, ethnic, or gender prejudice because of their identity as members of the group without regard to their individual qualities. For purposes of this program, these groups are women, African Americans, American Indians and Alaskan Natives, Hispanics, and Asians and Pacific Islanders.
The purpose of this program is two-fold. According to the USDA, "The agency helps remove barriers that prevent full participation of SDA farmers in FSA's farm loan programs, and provides information and assistance to SDA farmers to help them develop sound farm management practices, analyze problems, and plan the best use of available resources essential for success."
To qualify for these programs, FSA has a set of requirements. The maximum loan amount is $225,000, and cannot exceed 45 percent of the lesser of the purchase price of the farm or ranch to be acquired or its appraised value. The applicant must make a cash down payment of at least 5 percent of the purchase price.
The term of the FSA loan is 20 years at a fixed interest rate of 4 percent below the direct Farm Ownership loan rate or 1.5 percent, whichever is greater. The remaining balance of the purchase price may be obtained from a commercial lender or private party.
FSA can provide up to a 95 percent guarantee if financing is obtained from a commercial lender. This program provides a source of affordable financing for beginning farmers, as well as a method for retiring farmers to transfer their land to future generations.
and Farm Operation Loans
The FSA also offers loan for those farmers who are already established, and wish to grow their operation. Farm ownership loans may be used to purchase a farm, enlarge an existing farm, construct new farm buildings and/or improve structures, pay closing costs, purchase easements or rights of way needed in the farm's operation, and promote soil and water conservation and protection. Guaranteed farm ownership funds may also be used to refinance debt.
Eligible applicants may obtain direct loans up to a maximum indebtedness of $300,000. The maximum repayment term is 40 years for both direct and guaranteed farm ownership loans.
Operating loans are generally shorter term loans. "Operating loan funds may be used to purchase livestock, poultry, farm equipment, feed, seed, fuel, fertilizer, chemicals, insurance, and other operating expenses. The funds also may be used for borrower training costs, closing costs, and to reorganize and refinance debt."
No matter which program a purchaser decides to use, knowing the programs that are available can help save producers money, and help them purchase their dream property. Many lenders also offer similar programs, so it is best for purchasers to look at all of their options.
"FSA Farm Loan Programs provide a variety of loan types for every need," says Kareus. "Whether it's a beginning, socially disadvantaged, or an existing farm business, farm loan programs can help our customers grow and sustain their agricultural operations."
Gaining this access to credit can make a huge difference to farmers and ranchers.
"America's farmers and ranchers are the best in the world. By further expanding access to credit, USDA will help a new generation of farmers out-produce the world and ensure the strength of an American agriculture sector that drives our economy, creates jobs, and ensures the most secure and affordable food supply in the world," said Vilsack.