The advancing age of U.S. farmers and ranchers has raised concerns about who will be the future operators and owners of

U.S. farmland. USDA data indicates that over onethird of all farmland owners have less than 15 years of remaining life

expectancy (Dodson, 2004). This seemingly imminent transfer of farmland and related assets is likely to impact the

productive land base, local economies, and rural landscapes. While the greater availability of farmland presents increased

buying opportunities for aspiring farmers, high farmland values can make it difficult to accumulate the minimum

downpayment and to demonstrate the repayment ability necessary to finance these acquisitions. FSA’s direct farm loan

program represents one of the primary federal policy initiatives used to facilitate their farmland purchase by beginning family

farmers. This analysis examines the financial and demographic characteristics of beginning farmers receiving Farm Service

Agengey (FSA) direct farm ownership (FO) loans during fiscal year 2005.

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Abstract

The Farm Service Agency’s (FSA) Farm Business Plan was used to compare the characteristics of beginning farmers

receiving direct Farm Ownership (FO) loans in fiscal 2005 by the type of delivery mechanism. Regular FO loans were

commonly used by small and intermediate size family farming operations while FO loans made in participation with

commercial lenders were used by larger commercial-sized family farming operations. Startup beginning farmers in the

Corn Belt were more likely to utilize FO downpayment loans. Regardless of the delivery mechanism, nearly all

beginning farmers receiving direct FO loans had credit shortcomings that could inhibit them from commercial credit.

Charles Dodson is an Agricultural Economist with the Economic & Policy Analysis Staff of USDA's Farm Service Agency.

He is responsible for analysis of policy issues related to the Administration of USDA's farm loan program. He has also

served as a Financial Economist with USDA's Economic Research Service and a Professor of Agricultural Economics at

Texas Tech University. He holds a Ph.D. in Agricultural Economics and a MBA in Finance from the University of Missouri-

Columbia as well as B.S. and M.S. degrees from the University of Tennessee-Knoxville. Steve Koenig is an Agricultural

Economist with the Economic & Policy Analysis Staff of USDA's Farm Service Agency in Washington, D.C. Prior to joining

FSA, he was a Senior Financial Economist with USDA's Economic Research Service. He received is

B.S. degree in Crop and Soil Science and his M.S. degree in Agricultural Economics from Michigan State University.

Background

FSA delivers subsidized credit to family farmers through two mechanisms: direct loans and loan guarantees. Direct loans

are made, funded, and serviced by FSA, whereas guaranteed loans are made, funded, and serviced by commercial lenders

but guaranteed up to 95 percent against loss by the agency. Both delivery mechanisms provide long-term loans for FO

purposes to purchase or improve farm real estate or in the case of guaranteed loans, refinance existing debts.1

In recent years, tight federal budgets and high delivery costs have encouraged a general shift from direct toward guaranteed

lending. Despite this shift, the direct FO loan program has remained the primary method used by USDA to facilitate a

beginning farmer’s purchase of land. About 4,200 beginning farmers utilized direct FO loans to facilitate land purchases

between fiscal years 2000 to 2004 compared to just 1,420 who utilized guaranteed FO loans for land purchases (USDA,

Farm Service Agency). This reliance on direct FO loans reflects both higher targeting and greater restrictions on the use of

loan funds. The direct FO loan program is more highly targeted to beginning farmers with 70 percent of loan funding reserved

for use by beginning farmers compared to only 25 percent for the guaranteed loan program. Direct FOs may only be used for

either a farmland purchase or capital improvement while guaranteed FOs may only be used to refinance existing

indebtedness. While many aspiring farmers rely on the direct FO loans to finance a farmland purchase, delivery of these

programs requires large amounts of public resources. It has been estimated that direct loans cost the government $14.22 for

every $100 loaned which is over three times greater than the cost of providing loan guarantees (USDA, Farm Service

Agency). Given their higher delivery cost, it is important to better understand who benefits from these programs. This

analysis utilizes FSA Farm Business Plan (FBP) data to obtain detailed information on the farm size, financial performance,

commodity specialization, and operator characteristics of beginning farmers participating in FSA’s direct FO loan programs

during fiscal 2005.2 The availability of FBP data enables a level of analysis which had not been previously attainable. Earlier

studies of FSA loan program clientele relied on surveys whose results were subject to sampling and estimation variability

thereby limiting the informational detail provided from the analysis. In contrast this analysis was completed using actual data

on all FO loans makde in fiscal 2005. The information presented in this study enables analysis of possible impacts of future

policy changes on FSA direct borrowers. For example, concerns that current FO loan size limits prohibits beginning farmers

from acquiring economically-viable sized farm parcels increase the possibility that maximum loan size changes may be

considered in future legislation.3 But, raising loan limits without raising budget authority may result in disparate impacts

among different groups of farmers. While larger commercial-sized family farms may benefit from access to larger FSA loans,

groups who would have previously received FSA loans may find it more difficult to obtain such loans due to the increased

demand, assuming no increase in lending authorities. Direct FO loan applicants must meet certain eligibility

requirements. An eligible applicant must: (1) demonstrate an inability to obtain credit elsewhere at reasonable rates and

terms; (2) substantially participate in the farming operation for which the loan is to be applied; and, (3) not own a farm greater

than 30 percent of the median size farm in the county. In addition, to qualify as a beginning farmer, an individual or

entity must have not operated a farm or ranch for more than 10 years. A sole proprietor making application as a beginning

farmer must prove all parties in the farm business meet the beginning farmer criteria.4 There are three delivery mechanisms

utilized by the direct FO program; regular FO loans, loan participations, and downpayment loans. With a regular FO loan,

FSA can provide up to 100 percent of the financing for the transaction. Regular FO loans can be made

for amounts up to $200,000, have a maturity of up to 40 years, must be fully collateralized with real estate, and can be made

at FSA’s regular borrowing rate or at its limited resource rate. To increase the flexibility in meeting the credit needs of larger

commercial farms, participation loans were authorized in 1996. Under this authority, FSA can finance up to 50 percent of a

real estate loan that would qualify under criteria for a regular FO loan. The balance of the loan must be financed by another

lender. Use of participation loans enables FSA to provide financing for transactions which exceed the $200,000 loan limit.

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Interest rates on FSA portion of the participation can be at an annual interest rate of five percent or the regular FO rate,

whichever is lower. Other terms and eligibility requirements for FSA’s share of the participation are the same as for regular

FO loans. While non-beginning farmers are eligible to receive regular FO and participation loans, only beginning farmers were

considered in this analysis. Eligible beginning farmer applicants may also obtain a beginning farmer downpayment loan to

assist in the purchase of farmland. A beginning farmer that can make cash down payment of at least 10 percent toward the

purchase of a farm or ranch may be eligible for loans in amounts of up to 40 percent of the farm purchase price or appraised

value, whichever is lower. The loan has a term of 15 years with a fixed-interest rate of 4 percent. The remaining purchase

cost can be financed by commercial or private party lender with FSA providing a 95 percent guarantee. The purchase price or

appraised value, whichever is lower, may not exceed $250,000.

Previous Studies

Over the years, FSA credit programs have served younger farmers as well as smaller and more financially-stressed farms.

Studies from the 1990s found FSA direct loans were more likely to be utilized by smaller and financially stressed farms

and farms operated by racial minorities (Dodson and Koenig 1999; Dodson and Koenig 1994). A 1994 study concluded that

FSA was the primary source of credit among young farmers with limited capital (Dodson and Koenig 1995). Studies from

the 1960s indicated FmHA borrowers were younger, operated smaller farms, and had less capital than farmers as a whole

(McD Herr).5 In the 1950s, FmHA borrowers were also found to be younger and just becoming established in farming

(Bierman and Case). Some studies have questioned the merit of using credit as a policy tool to assist beginning farmers.

Higher debt loads increase financial risk. Since beginning farmers tend to lease rather than own farmland, beginning farmers

may benefit more from policies which address leasing rather than purchasing real estate. Dodson (1996) suggests that

policies to assist beginning farmers should go beyond traditional credit programs and consider equity investments or tax

incentives.

More recent studies of FSA loan programs have focused on general program effectiveness, regional demand variability, and

clientele served. A 2005 University of Arkansas study concluded that direct loan programs were consistent with the

mission objectives and that for the most part borrowers were using the program as a temporary rather than permanent

source of credit (Nwoha, et al.). Another recent study examined reasons for varying levels of FSA market penetration in the

overall loan market and found FSA loan program usage was greater in counties with lower per capita income, counties with

FSA loan service centers and greater FSA funding in previous years, and regions experiencing greater financial stress

(Dodson and Koenig, 2003). A 2006 USDA Report to Congress found direct loan program borrowers to be more financially

stressed than guaranteed loan borrowers and that many current direct loan program borrowers may not be able to continue

farming, at least in the short-term, without access to government subsidized credit (USDA, Farm Service Agency).

Data and Results

In 2005 FSA implemented the FBP, an online accounting <