Bankers Praise Farm Bill's Credit Title

Farm Bill Raises FSA Loan Guarantee Limit

Katie Micik Dehlinger
By  Katie Dehlinger , Farm Business Editor
The farm bill increases USDA's Farm Service Agency loan guarantees to $1.75 million, while boosting direct farm ownership loans to $600,000 and direct operating loans to $400,000. (DTN file photo by Nick Scalise)

MOUNT JULIET, Tenn. (DTN) -- When President Donald Trump signs the farm bill into law on Thursday, one of the immediate changes will be an increase to Farm Service Agency loan guarantees and direct loans.

Lenders say it's an overdue fix, even though many would like to see even higher limits down the road.

"The biggest thing is these give more flexibility," said Ed Elfmann, senior vice president for ag and rural baking policy at the American Bankers Association. "The more flexibility you can have, the better, especially as these operations grow larger in size. We have to remember that ag is not -- farms are not -- small, little, family operations like they used to be. They're complex. They're multiple entities. They're growing in size and scope."

The Agricultural Improvement Act of 2018 raises FSA loan guarantees to $1.75 million from the current $1.399 million. It also doubles the loan limit for direct farm ownership, or real estate, loans to $600,000 and increases the limit on direct farm operating loans by $100,000 to $400,000.

Elfmann said lenders often use a combination of banking products to meet borrowers' needs. With an FSA loan guarantee, the bank or another lender closes the loan and advances the funds to the borrower. In the event the borrower defaults, FSA reimburses the bank. A direct loan is funded by the FSA, which also makes and services the loan.

Mark Scanlan, senior vice president of agriculture and rural policy at Independent Community Bankers of America, said the higher limits will help community banks serve more borrowers.

"There's been a slight decline in the demand for guaranteed farm loans in recent years for a variety of reasons, but one of those reasons is the payment limit. So this will help serve those types of farmers, particularly when we have this continued decline in farm income levels," Scanlan told DTN.

Farm incomes have declined since hitting their peak in 2013, and USDA forecasts farm incomes in 2018 will be down 12% from 2017. It's below the average net farm income for the past 17 years.

"Agriculture is in a situation where there could be a lot of ongoing distress going forward," Scanlan said. "We'd all like to see higher prices, but right now, that's not happening. And there are situations where farmers in some areas have really abundant crop harvests, and because of the abundant yields, that gives them sufficient income to make up for the low prices. But that's not the situation across the nation."

Elfmann said he thinks more farmers will take advantage of the higher loan guarantees over the next year or two to help them "roll through some tougher times." While something could happen to move prices higher, like drought in Brazil or Argentina, "The way it's projecting out right now, things like loan guarantees are going to be important because it helps the lender help somebody keep the operating line the same size it had been, and not have to drive up the interest rate too much."

The other side of falling incomes is the rising cost to raise a crop. The price of everything from seed and chemicals to equipment and land has risen over the past decade. Elfmann said it can cost upward of $4 million to start a farm from scratch today.

"When we look at things like that, $1.75 (million) still doesn't get us there, but it gets us a lot closer than $1.4 (million) did," he said. "We're going to keep pushing for them to go higher because it's still not where it needs to be to help everybody we'd like to help. But at least it's a step in the right direction."

There are also sectors -- poultry is a prime example -- where the up-front capital expenses are more than FSA guarantees can support. Elfmann said a farmer who wants to build eight barns in the corner of a field might need a loan that's $2.5 million to $3 million.

"When you're getting into that type of money, that's outside of the FSA scope. You get into trying to do two separate loans, and it becomes a paperwork nightmare," he said. That's why many poultry farmers turn to the Small Business Administration, which can guarantee 75% of a loan up to $5 million.

However, agricultural lending through SBA has always been controversial, Elfmann said, and a proposed rule would halt SBA lending to farms, among other changes. A comment period on that rule ended Dec. 18.

He said the farm bill made two other subtle but important changes to FSA lending. It indexed loan guarantees to inflation, so they'll increase over time, and it raised the overall authorization for FSA lending to $12 billion, up from $4.2 billion.

Annual appropriations will continue to set the amount FSA loans out each year, but Elfmann said the expanded authority gives Congress more flexibility to add funds when demand is high.

Elfmann and Scanlan praised a number of other aspects of the farm bill, like the preservation of the crop insurance program, fixes to safety net programs and several rural development programs.

Bankers "have a strong interest in farm bills because it provides business certainty in terms of their planning, both short term and for the next three to five years," Scanlan said. "Now we can move forward without the anxiety and apprehension that may have existed even if we would have just done an extension. It's good to have it locked down and in place."

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Katie Dehlinger