A Cornbelt farmer need not look too far to realize there is a transitional problem in agriculture, which has not germinated young farmers replacing those who want to retire. Every year the average age of farmers gets a bit older, in part because there is an insufficient number of younger farmers. They either have moved away from the farm or cannot get adequate financing to enter farming. And that is a problem.

USDA statistics indicate one-third of all farmers have less than 15 years of remaining life expectancy. While that indicates the economic environment may be right for young farmers to purchase farmland and equipment and set up shop, the cost to do so makes it nearly impossible. Economists Charles Dodson and Steve Koenig of the Farm Service Agency examined the finances of beginning farmers who obtained financial assistance from FSA’s Farm Ownership loans.

FSA provides both direct loans and loan guarantees for farmers working with commercial credit sources. Some 4,200 beginning farmers used direct loans for land purchases in 2000 to 2004, which was three times the number who opted for the guaranteed loans from commercial sources, but in doing so provided farm business plan data that Dodson and Koenig analyzed.

Concerns have been expressed that loan limits are not adequate to provide enough capital to help create a viable farming operation. Since the fund is limited, providing higher limits would shut some young farmers out of consideration because the money ran out. Applicants for the program must be unable to obtain credit elsewhere, substantially participate in the farming operation, and operate only a modest sized operation. The Farm Ownership program will loan up to 100% of the transaction, with a $200,000 cash limit and a 40 year term, with real estate collateral.

Dodson and Koenig have long studied the issue of credit for beginning farmers, reporting that higher debt loads increase financial risk, some solutions are leasing farmland, and that some beginning farmers should look beyond traditional credit programs.

Of the 1,425 beginning farmers in the program in 2005, every state was represented, but 53% were in the Great Plains and Western Cornbelt. Dodson and Koenig say regardless of how the loan was structured, 85% of the beginning farmers in fiscal 2005 had credit problems that would have prevented them from obtaining commercial credit. The participants were analyzed for return on assets, current ratio, debt to asset ratio, repayment margin, and loan to value ratio. The farm business plans did not include any information about credit history, only the viability of the proposed farming operation.

The economists said the most common problem was the lack of collateral to secure their loan. While commercial lenders want loan to value ratios not less than 80%, the Farm Ownership program participants averaged 90%. Other problems included tight cash flow and limited repayment capacity, and one-third had debt coverage ratios of less than 115%.

Compared to the average US farmer under 35 years of age, who has an average net worth of $440,000, the participants in the Farm Ownership program averaged only $160,000 of net worth. That reflects one of the criticisms of the program in that it excludes potential operators of commercial farms and supports only those with small farming operations. 46% of the participants used the money to purchase land for a beef cattle operation, and subsequently reported less than $50,000 in annual sales. 22% of the borrowers received the maximum sized loan.

Summary:
Beginning farmers with limited credit can obtain a variety of financial assistance from the Farm Service Agency’s Farm Ownership lending programs. However, an economic analysis of the participants and their farm business plans indicate that 85% of them would be unable to qualify for commercial credit sources. With limited funds in the program, participants are subsequently limited to smaller loans, consequently can only create smaller farming operations under the typical size of commercial farms.