Buying The Farm

By Deborah R. Huso, Contributing Editor

I’ve been on the farm all my life,” says 35-year-old Donovan Braun, who runs beef and feeder cattle on some 3,000 acres in south-central North Dakota, near Bismarck.

Right out of school, Braun, who grew up farming alongside his parents and grandparents, bought a few head of cattle, rented pasture for them and worked for other farmers to earn income. Gradually, he built up his own operation, and when his grandfather wanted out of the business, Braun wanted to buy his land—960 acres.

“My grandfather wanted what it was worth,” says Braun, who went to the local Bank of Steele to see if he could get financing to make the purchase.

His local banker told him about the Beginning Farmer Loan Programs offered through the Bank of North Dakota, the only state-owned bank in the nation. To qualify for one of the bank’s beginning farmer real estate loans, the applicant cannot have owned farmland valuing more than 30% of the resident county’s average farm size.

It’s essentially an interest buy-down loan, allowing local banks to offer reduced interest rate loans to young and beginning farmers.

Braun filled out an application, qualified for a loan to buy his grandfather’s farm and now pays only 2% interest on a loan with rates that readjust every five years—up or down. While Braun says he could have qualified for a conventional bank loan, working with the Bank of North Dakota allowed him to get more for his money.

“You’re able to pay more per acre on land because of the low interest rates,” he explains.

Freeing up financing. Cash is a hard thing to come by for young farmers, even those who grow up in family businesses. For parents and grandparents, land represents equity for retirement.

Even if they want sons and daughters to run the family farm, the kids still have to buy the land in most cases. And with prices running at all-time highs in many regions, beginning farmers rarely have the cash or credit necessary to purchase it, making entry into production agriculture even more challenging for young farmers.

That’s where state agricultural finance programs can help, offering reduced interest rate loans for land, chattel and equipment.

One of the most common types of loans available for beginning farmers are Aggie Bond Beginning Farmer Loan Programs. In these programs, the state creates a bond that allows lenders to earn federal tax-exempt interest income on loans.

That tax savings allows local banks, such as Braun’s bank, in Steele, N.D., to offer lower interest rates to young farmers, giving them both more bang for their buck and lower payments than they would have through conventional loan programs.

In the case of North Dakota’s beginning farmer loan programs, young farmers like Braun can qualify for real estate or chattel loans of up to $400,000. Applicants must have a net worth of less than $500,000. Interest rates are fixed at 1% below the Bank of North Dakota’s base rate with a maximum interest rate of 6% for the first five years.

Other programs. Not all states offer Aggie Bonds, but most, like Texas, have some type of loan program to help beginning producers. Among the offerings in Texas are both an Interest Rate Reduction program and an Agricultural Loan Guarantee (ALG) program.

Texas’ ALG program, established in 2009, guarantees loans for lenders while also providing an interest rebate to borrowers. Interest rebates can go as high as $5,000 per year, says Bryan Black, director of communications for the Texas Department of Agriculture.

Thirty-five-year-old Nathan Melson owns 210 acres and leases another 46 acres near Red Oak, Texas, for his grass-fed beef, lamb and chicken operation. He took out an ALG loan in 2010 after reading about the program in a local rural newspaper.

“It’s hard to approach banks for an agricultural loan,” he says, noting that many of the local banks were not even familiar with the program. But his local Farm Credit bank was and offered to work with him to apply.

Melson used the loan to purchase 135 acres of his mother’s farm. He pays about $16,000 a year in interest on his real estate loan and gets around $4,000 of that back as a rebate each year—the equivalent of one quarterly payment on the loan. The rebate makes his 6.55% loan come in about 2½ percentage points lower.

“I could have bought the land without the ALG loan, but this program made it easier,” Melson says. He also benefited from one of the Texas Department of Agriculture’s Young Farmer Grants in 2010 to buy Spanish meat goats.

Melson says he’s grateful for the state finance programs that allow young farmers like himself to begin or expand agricultural operations, yet he wonders if the efforts are enough.

“I’m kind of worried about what’s going to happen to food production in this country in the next 10 years,” he says. “Fewer young people are going into agriculture, and people don’t realize how much capital it takes to get into farming.

“If I hadn’t inherited some of my land and equipment, I wouldn’t have been able to do it,” he adds.

Braun, who currently has 150 beef calves as well as a custom backgrounding operation to feed other farmers’ cattle in the winter, agrees. “If you’re just starting,” he says, “it can be nearly impossible to compete with an established producer.”

More info

For more information on state programs for young farmer financing, visit the National Council of State Agricultural Finance Programs online at www.stateagfinance.org.

(BS)

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