When California FarmLink makes loans for beginning farmers and ranchers, we focus on affordability, flexibility and financial well-being. One of our top concerns is matching the term of the loan to the time period benefited by the loan. This means allowing a few years to pay back loans used to develop production and business management capacity intended to benefit the business over several years. Unfortunately, USDA Farm Service Agency (FSA) programs - the nation’s key sources of affordable farm financing - do not do a good job of matching loan repayment terms to the multi-year benefits of early-stage capacity investments. To remedy this challenge, California FarmLink is advocating for the Capital for Beginning Farmers and Ranchers Act (H.R. 8598 | S. 4441) as part of the Farm Bill reauthorization process, directing the FSA to develop a multi-year Beginning Farmer and Rancher Development Loan Pilot Program.
Beginning farmers and ranchers often pursue business models featuring diverse and specialized production and marketing strategies requiring significant start-up costs in their first years of operation. Their businesses need substantial early-stage investments which will deliver benefits and help to ensure long-term viability for years to come, such as:
- Increasing soil fertility, establishing perennials, and developing breeding stock
- Accumulating appropriate equipment, tools, and supplies
- Developing branding and reputation, accessing new markets, and refining product offerings
- Creating bookkeeping systems that are sufficient for invoicing customers and managing profitability on diverse crops and livestock
- Establishing payroll and implementing legally compliant labor practices as well as food safety, environmental, and other regulatory compliance requirements.
“Operating loans offered by FSA have short repayment periods that are well suited for annual operating costs, but longer-term costs are often rolled into the same annual loan,” says Reggie Knox, CEO of California FarmLink. “The brief payback period forces borrowers to make loan payments rather than accumulate working capital. Ironically, shorter loan terms actually lock beginners into longer-term reliance on debt financing.” Extending the loan term lowers the annual cost of debt service and allows beginning farmers to accumulate working capital rather than remain reliant on annual operating loans.
Consider the following: A farmer invests $5,000 of their savings into their business. Their annual operating budget shows they need an additional $10,000 in order to produce and sell a crop. In addition they need to invest in setting up management systems including bookkeeping, human resources, a website, food safety and organic certification records, etc. They estimate that an initial investment of $6,000 will get them set up and after that they will be able to cover administrative costs with annual farm profits. As part of their operations plan they also need to purchase $4,000 worth of miscellaneous small tools and equipment expected to last at least five years. The total cash needed for the year ahead is $25,000, so they need loan funds of $20,000.
If the full $20,000 is structured as an operating loan - which is the usual case today for most FSA loans - the farmer needs to repay $20,000 out of net profits in their first year of operation. If they have $40,000 in net profit and repay the $20,000 in loan principal and take a $15,000 draw as their own income, they end the year right where they started - with $5,000 to invest in next year’s crop.
Alternatively, if the loan were structured as an annual operating loan of $10,000 and a five-year developmental loan of $10,000 the farmer would only need to repay $12,000 of principal in the first year. The $8,000 difference can be used as working capital to finance the next year’s crop, greatly reducing their need to take out an operating loan in the next year.
The Capital for Beginning Farmers and Ranchers Act works by alleviating the impact of loan repayment as well as reducing loan collateral requirements. The FSA currently requires collateral valued in excess of the amount of the loan. Since beginning farmers do not often have a lot of collateral (i.e. tangible business assets such as machinery, equipment, land, livestock, or farm products), this requirement restricts their ability to borrow - and short repayment terms limit their ability to accumulate collateral.
The legislation introduced this week, introduced by Rep. Marilyn Strickland (WA), Rep. Alma Adams (NC), Rep. Jimmy Panetta (CA) and Sen. Peter Welch (VT), would create a Beginning Farmer and Rancher Development Loan Pilot Program which would authorize:
- A new FSA farm loan product with a repayment term between 3 and 10 years, and interest rate of not more than 3% to assist with initial assets and the development of production and management systems;
- A loan limit of $100,000 for both direct and guaranteed development loans;
- Reduced collateral requirements of not greater than 100% loan-to-value;
- Flexible principal repayment as determined by FSA based on year-end cash flow and borrower plans, but not less than 1% of the remaining balance annually;
- Robust technical assistance for development loan borrowers addressing farm and ranch management issues; and
- Evaluation and reporting that measure pilot program success.
California FarmLink is proud to have played a leadership role in working with federal policymakers to introduce this bill. “As a Community Development Financial Institution,” says Knox, “we have flexibility to help our borrowers, but the terms FarmLink can offer are impacted by FSA’s loan guarantee rules.” Learn more about the bill here.
FSA loan guarantees are vitally important to the agricultural community. The more than $60 million we have lent to small and beginning farmers and ranchers since 2012 demonstrates our commitment to investing in the success of beginning farmers. They represent the future of American agriculture and we are proud to advocate for lending programs that fit their operations and support their success.
In partnership with the National Sustainable Agriculture Coalition, FarmLink encourages our community of farmers, borrowers, and other supporters, as well as other agricultural lending partners, to join with us in supporting this innovative bill, and advocating for its inclusion in the new Farm Bill. We will soon send action alerts regarding the Capital for Beginning Farmers and Ranchers Act and we encourage you to get involved! Sign up here.
