Farm Credit Concessions

By Marcia Zarley Taylor
DTN Executive Editor

NASHVILLE (DTN) -- American agriculture lost a generation of young farmers during the 1980s credit crisis. Farm lenders are reaching out to today's beginners with education and special loan terms in an attempt to make sure history doesn't repeat.

Louisville-based Farm Credit Mid-America now coaches more than 600 young and beginning farmers in its "Know-to-Grow" program, a special designation that not only teaches newcomers how to become fluent in balance sheets and financials, but temporarily relaxes credit standards to help them get a foothold in farming.

In Nashville this week, the association filled a Marriott ballroom with young farm couples, some who farmed thousands of acres with parents but others who were part-time school teachers on micro farms or even Amish families who needed small mortgages to buy farmland.

Mid-America's program applies only to operators in its four-state region of Ohio, Indiana, Tennessee and Kentucky, but Farm Credit Services of America has already launched a similar educational program for borrowers in Nebraska, Wyoming, South Dakota, Iowa and eastern Kansas. Boards at both associations are confident they can carry the risks of start-up farmers this time, in part because they set aside strong capital reserves during agriculture's peak income years.

One major benefit for "Know-to-Grow" participants is leniency on bank standards. That should help beginners qualify for credit more easily and stay off lender watch lists if farm financials deteriorate. For example, Mid-America's normal credit standards require full-time farm borrowers to hold a minimum of 20% of their farm's gross revenue in working capital.

A "Know-to-Grow" designee needs only 5% working capital levels, given that they are typically in a high-growth mode and have had less time to accumulate savings. Mid-America also lowers the bar on solvency -- the measure of net worth divided by total assets -- to just 20% for full-time beginners, versus 55% for traditional operators.

Such favors helped 23-year-old Skylar Davis of Covington, Tennessee, pick up a bargain grain buggy a few weeks ago. In his first full year farming, he qualified for a five-year, 4% equipment loan, snagging the item for $16,000 instead of the $30,000 it would have commanded just a few years ago, he said. He spent much of last winter scouting machinery auctions to research best deals on used equipment, scooping up a header trailer recently worth $6,500 for $4,200.

It turns out with more affordable equipment this isn't such a bad time to be a start-up farmer. "I couldn't have done it without them," he said.

Until Mid-America asked Quint Pottinger, 27, of New Haven, Kentucky, what they could do for him, he had heard many more "noes" from farm lenders than "yesses," he said. He learned not to simply ask for credit, but to have a plan on how he could pay back money he needed to improve his operation.

"Young farmers are in a different ball field than established operators," he said. "We can't go to a bank and get conventional credit. Here they want us to be contenders for the long term."

Pottinger used Mid-America's "Know-to-Grow" program to buy a $26,000 grain trailer that saves him 30 cents per bushel to haul his own grain. He also needed a building lease on 170,000 bushels of grain storage and a grain drier so he can hedge grain for future delivery rather than sell straight out of the field or pay for commercial storage. Local distilleries offer premiums for high-grade corn, but they are sticklers for quality and moisture content. The investment has paid him back tenfold, Pottinger said.

Eventually, Mid-America wants designees to graduate to conventional credit terms, but they could continue to receive special treatment for up to five to 10 years, said Gary Book, Mid-America's assistant vice president for credit underwriting. The main goal is to provide young producers with the financial and risk management knowledge they need to operate.

"There's inherent risk in farming due to the nature of the business," Book said. "This allows them to plan for it and mitigate it."

After the 1980s Farm Credit bailout, Congress insisted that the system devote more resources to young, beginning and small farmers. Critics in the banking community have charged Farm Credit with straying from its mission, but a June 2016 study by the Farm Credit Administration gave the system high marks for compliance. Its audits show borrowers under age 35 accounted for 18% of the system's outstanding loans in calendar 2015. Those with less than 10 years' experience accounted for 26% of loans and small operators (under $250,000 sales) 48% of all loans.

Given the bleak outlook for grain farming at the moment, it's impossible to say whether better education and credit concessions will help young operators ride out this business cycle better than the youngsters who lost farms in the 1980s. Farm Credit Mid-America's Book is hopeful.

"One thing about this generation is they are very diversified. In many instances, they aren't straight cash grain farmers. They're dabbling in local foods, they raise produce alongside row crops, they run cattle or are putting in confinement operations to provide more income streams," he said. "A lot of individuals in this group will be fine in this downturn. They're resilient and are trying to find ways to make it work."

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(AG/SK)

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