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 system, which documented borrower’s cash flow, expenses,

assets, debts, and other important financial information. This data source provides a greater capability than was previously

available to analyze the characteristics of all farmers receiving FSA direct loans. In this analysis, the FBP database was

used to examine the characteristics of beginning farmers receiving

direct FO loans in fiscal 2005, the first year the FBP was fully implemented. Characteristics of FSA direct borrowers are

presented by production region, delivery mechanism, production specialty, and farm size.

Direct FO Loans to Beginning Farmers Were Regionally Concentrated

There were 1,425 beginning farmers who received FSA financing through regular FO downpayment, or participation

loans in fiscal 2005. Even though some direct FO loans were made to beginning farmers in every state, use was

geographically concentrated in the Great Plains and the western Corn Belt (Figures 1-3). Oklahoma, Missouri, Nebraska,

Iowa, Minnesota, Wisconsin, South Dakota, and North Dakota accounted for 53 percent of the direct FO loans made to

beginning farmers in fiscal 2005. Given the limited overall availability of FSA direct FO loan funds and the process used to

allocate funds to states, greater usage may not necessarily imply greater demand by farmers.6 Fewer direct loans in some

states may not necessarily be a consequence of fewer eligible beginning farmers, but rather reflect less availability of direct

loan funds because of lower administrative allocations. Regional patterns are also apparent in the type of direct FO loan

delivery mechanism. The use of participation and downpayment loans by beginning farmers was greatest in the central U.S.

with Iowa, Illinois, and Missouri accounting for the bulk of downpayment loan usage (Figures 1 and 2). Among beginning

farmers receiving direct FO loans, 63 percent were assisted through participation loans in the Corn Belt and 51 percent used

participation loans in the Northern Plains (Table 1).7 There were some localities with more intense usage of loan

participations such as southwest Wisconsin, northwest Iowa, and the Michigan thumb perhaps reflecting policies of local

lenders (Figure 2).

In many parts of the country, beginning farmers were served almost exclusively through using regular FOs (Figure 3). Ninety

percent of beginning farmer direct FO borrowers in the Northeast, Appalachia, and Delta used regular FO loans (Table

1). A possible explanation for the absence of participation loans in these regions is the lack of specialized agricultural

lenders which is less common in the Northeast and Appalachia.

Participation Borrowers Operated Larger Farms

The characteristics of beginning farmers receiving participation loans indicate they tend to serve larger commercial farming

operations. These beginning farmers carried greater amounts of debt, had greater revenues, and were older than beginning

farmers who used only regular FO loans or downpayment loans. Participation loan borrowers held more assets and more

indebted as indicated by outstanding debts of $351,606 compared to $297,843 for regular FO borrowers (Table 2).

Participation loan borrowers were less reliant on FSA for their credit needs, receiving less than half of total credit from FSA

compared to 62 percent for regular FO loan borrowers. Expected average annual gross revenues for participation

borrowers were greater than that of regular or downpayment borrowers (Table 3). And, only eight percent of those utilizing

regular FO loans expected annual sales of greater than $250,000 for 2005, compared to 43 percent for participation

borrowers (Table 1). The average age of participation borrowers was 34 years, compared to 29 years for downpayment

borrowers and 32 years for regular FO (Table 4) Even though annual non-farm wages were similar among loan

delivery systems, participation borrowers received a much greater share of their household income from the farm. While

average off-farm wages for regular FO loan borrowers were only $4,000 more than for participation loan borrowers,

expected farm income was $35,000 less (Table 3). Consequently, two-thirds of total income for participation

borrowers came from the farm compared to only one-third for regular FO borrowers. Also, a larger share of a participation

borrowers’ gross farm income came from crops.

Downpayment Loans Fund Appear to Fund Start-Ups

Because they were younger, less experienced, and operated smaller farms, beginning farmers receiving downpayment loans

are more likely to be start-ups. Over 40 percent of downpayment loan recipients had annual revenues of less than

$25,000. With an average age of 29, only 5 years of farming experience, and lower levels of assets and net worth, these

operations were less established than beginning farmers receiving other types of FO loans (Table 1). Downpayment

borrowers appeared more creditworthy than either regular FO loan or participation loan borrowers because their debt-to-asset

and loan-to-value ratio was less while their average FSA credit score was higher (Table 1; Table 4). But, this may simply

reflect the requirement that downpayment borrowers come up with a 10 percent down payment to apply to their purchase. In

contrast, participation and regular FO beginning farmer borrowers typically put down less than 10 percent of the

purchase price.

Direct FO Recipients Did Not Meet Commercial Lending Criteria

Regardless of the delivery mechanism, nearly all beginning farmers receiving loans in fiscal 2005 had credit shortcomings

that would likely inhibit them from receiving commercial credit. The FBP allows for the calculation of commonly used

measures of financial performance used to evaluate applications, such as the applicant’s solvency, farm profitability,

collateral position, liquidity, and repayment ability. At the time of loan application each applicant based on a weighted score

of financial measures which includes return-on-assets (ROA), current ratio, debt-to-ratio, repayment margin, and loan-to-

value ratio.8 Those with the highest overall rating scores are considered potential candidates for commercial credit. The next

highest group is classified as standard, and is generally characterized by applicants meeting commercial standards in all

but one of the credit criteria. Acceptable applicants typically have credit shortcomings in two credit criteria. Borrowers in the

doubtful category typically have credit shortcomings in more than two credit criteria and represent loans with the highest risk

of loss. FSA’s internal scoring procedure indicated that all but 15 percent of beginning farmers receiving direct loans in fiscal

2005 might not meet commercial credit standards (Table 4). Recipients of downpayment loans appeared to be financially

stronger than participation loan or regular FO loan borrowers with a lower score and higher share classified as commercial.

Since the FBP did not include any data on credit history, it can not be ascertained whether those classified as commercial

could have actually received commercial credit. This is especially true among beginning farmer borrowers whose more

limited farming experience would have provided lenders with a short credit history on which to judge repayment capacity.

Probably the most consistent credit shortcoming among direct FO loan recipients was the inability to provide adequate

collateral to fully securitize the loan. Commercial lenders prefer that loan-to-value ratios not under 80 percent on farm real

estate loans (Table 4). Most beginning farmers receiving direct FO loans failed to meet this criteria. The average loan:value

ratio was 90 percent, with nearly 70 percent of all direct FO loan borrowers putting down less than 10 percent. Loan-to-value

ratios were lower for downpayment loans because of the requirement of a 10 percent investment on the part of the

borrower. Tight cash flows and limited repayment capacity represented other common credit shortfalls. About one-third of all

beginning farmer direct FO loan borrowers had debt coverage ratios of less than 115 percent which is a typical minimum

standard used by commercial lenders (Table 4). Regardless of the delivery mechanism, cash flows were tight with total cash

inflows exceeding total cash outflows by less than 5 percent (Table 3). Generally, beginning farmers receiving direct FO

loans in fiscal 2005 had limited capital and solvency. Average net worth for these borrowers was only $160,000 and ranged

from $122,918 for downpayment borrowers to $194,291 for participation borrowers (Table 2). This was substantially less than

the average net worth of $440,000 for all farmers under 35 years of age (USDA, Economic Research Service). The average

debtasset ratio of 0.66 combined with an average of 6.7 loans per farm would likely cause commercial lenders serious

concerns (Table 4). Plus, 20 percent had debt-asset ratios greater than 0.80 indicating limited capacity to withstand a short-

term economic downturn.

While regular FO and participation loan borrowers exhibited similar financial profiles, downpayment borrowers were

generally financially stronger. Since downpayment borrowers must put down 10 percent of the purchase price and be able to

cash flow a 15 year loan amortization, their relatively greater financial strength is not surprising. Any policy changes

affecting the downpayment loan program which provides more flexibility to applicants is likely to encourage use in more

regions and among applicants with less means.9

Current Loan Limits May Constrain Ability to Serve Some Beginning Farmers

One criticism of the current $200,000 direct FO loan limit is than it restricts service to commercial-sized farms. With average

annual sales for 2004 of $600,000, it is unlikely that direct FO loans alone will meet the complete credit needs of many

larger commercial farms (USDA, Economic Research Service). Consequently, regular FO loans may be more suitable for

smaller farms and farm types with less capital requirements. Nearly half (46%) of beginning farmers who used regular FO

loans exclusively to finance a land purchase specialized in beef cattle farming (Table 1). Beef cattle farms are typically

smaller, as indicated by 2004 average annual sales of $46,000 compared to $155,000 for cash grain farms. Half of the

beginning farmers receiving regular FO loans reported $50,000 or less in annual sales compared to just 27 percent for FO

participation borrowers.

 With 22 percent of regular FO borrower receiving the maximum size loan, the current loan limits are a greater constraint on

regular FO loan borrowers than on participation loan borrowers where 16 percent of borrowers were at the $200,000 limit.

While participations enable FSA to serve farms whose mortgage credit needs exceed $200,000, these loans may be more

risky, since FSA typically subordinates their first lien position in order to facilitate commercial lenders to participate.

Summary

The availability of FBP data provided detailed information on the characteristics of FSA direct borrowers at a level not readily

attainable in the past. Distinct differences were indicated in the types of farmers served by the three direct FO delivery

mechanisms. The combination of smaller farm size, lower farm income, and specialization in beef cattle production

suggested regular FO loan funds were mostly being used to support small and intermediate sized family farming operations

while participation loans were going to more established family farms, especially in the Corn Belt and Northern Plains. Start-

up beginning farmers were more likely to utilize the downpayment loan option, but only if they lived in Iowa, Missouri, or

Illinois.

Even though regular FO loans tended to serve smaller sized farm operations, all recipients appeared to meet general

eligibility requirements. Most regular FO loan borrowers had limited capital, solvency, and collateral necessary to adequately

securitize a loan. With 85 percent not meeting commercial credit standards, regular FO loan borrowers would likely not

have been able to obtain credit elsewhere. While current loan limits restricts the ability of FSA to meet the full credit needs

of commercial-sized farming operations, higher loan limits would require greater budgetary resources and may affect the

clientele served. Increasing loan limits would most benefit beginning farmers in regions where the participation delivery

mechanism is not being used. The greatest impact from higher loan limits will likely occur in regions outside the north

central U.S. where participations are less commonly used. Regular FO loan programs are currently more focused on

lending to smaller farm operations, many of which specialize in beef cattle. Raising loan limits may affect the composition of

applicants and the type of farm which utilizes regular FOs. Higher loan limits would likely increase demand from larger

commercial-sized family farms. Among commercial-sized farms likely to utilize participations, higher loan limits may

increase FSA’s share of credit provided. Through a combination of higher loan size limits and loan participations, farms with

real estate credit needs in excess of $500,000 would be more apt to utilize direct FO programs.

Endnotes

1 For more information on FSA farm loan programs,

http://www.fsa.usda.gov/dafl/default.htm. Accessed on May 17, 2007.

2 For more detailed information see

http://www.agriculture.com/ag/story.jhtml?storyid=/templatedat.a/ag/story/data/future_040406looker.xml&catref=ag9030

Accessed May 17, 2007.

3 In their 2007 farm bill Proposal, USDA proposes direct FO loan limits be raised from $200,000 to $500,000

(http://www.usda.gov/documents/07title5.pdf). Accessed on May 17, 2007.

4 These criteria are based on specifications in the Consolidated

Farm and Rural Development Act of 1961 (CONACT), as amended. See USDA fact sheet Loans for Beginning Farmers

and Ranchers http://www.fsa.usda.gov/pas/publications/. Accessed on May 17, 2007.facts/html/begloan05.htm

5 The Farmer’s Home Administration (FmHA) was the predecessor to current Farm Service Agency farm loan

programs.

6 Administrative allocations of annual loan funds to individual states are determined by formula and are based on historical

usage, farm income, and number of farms.

7 For a description of USDA production regions see:

http://www.ers.usda.gov/data/farmincome/USDA-Productionregions.. Accessed on May 17, 2007.htm

8 FSA requires loan accounts to be classified after the borrower receives the initial loan. This classification is tool be based

on a financial statement which includes the initial loan and any changes in debt or assets, including refinancing or assets

purchased with new loan funds (FmHA Instruction 2006-W, Section 2006-1103).

9 In their 2007 farm bill Proposal, USDA proposes reducing from 10 percent to 5 percent the amount of the purchase price

the beginning farmer must put down. It is also proposed that the interest rate on FSA share of the loan be reduced from 4

percent to 2 percent and no installments are due until the end of the second year.

2007 JOURNAL OF THE A|S|F|M|R|A77

References

Bierman, Russell W. and Betty A. Case. “The Farmer’s Home Administration and Its Borrowers”. Agricultural Finance

Review. USDA Agricultural Research Service. (July 1959). pp 40-67.

Dodson, Charles B. “Is More Credit the Best Way to Assist Beginning Low-Equity Farmers”. USDA, Economic Research

Service. AIB 724-04. (August 1996). Dodson, Charles B., and Steven R. Koenig. "FSA Credit Programs Target Minority

Famers.” Agricultural Outlook.AGO-266. (Nov. 1999). pp.14-16.

Dodson, Charles B., and Steven R. Koenig. "Explaining County-Level Variability in Farm Service Agency Farm Loan

Programs.” Agricultural Finance Review. Vol. 63. No. 2. (Fall 2003).

Dodson, Charles and Steve Koenig. "Young Commercial Farmers: Their Financial Structure and Credit Sources.” Special

article in Agricultural Income and Finance USDA, Economic Research Service. AIS-56. (February 1995). pp. 40-44.

Dodson, Charles and Steve Koenig. "The Major Farm Lenders--A Look at Their Clientele." Agricultural Outlook. United

States Department of Agriculture. AO-214 (December 1994). pp. 24-27.

Dodson, Charles B. “Farmland Ownership Transitions.” Journalof Farm Managers and Rural Appraisers. Vol. No. 1. (2004).

Pp. 19-26.

McD. Herr, William, “Characteristics of New Borrowers Obtaining Farm Ownership Loans from the Farmer’s Home

Administration—Fiscal 1966”. Agricultural Economics Report 184. USDA Economic Research Service. May 1970.

Nwoha, John, Bruce Ahrendsen, Bruce L. Dixon, Eddie C. Chavez, Sandra J. Hamm, Daniel M. Settlage, and Diana

Danforth. Farm Service Agency Direct Farm Loan Program Effectiveness Study. Research Report 977. Arkansas

Agricultural Expiriment Station, Division of Agriculture, University of

Arkansas System. Fayetteville, AR. December 2005. USDA. Economic Research Service “Farm Business and

Household Survey Data: Customized Data Summaries from ARMS”. http://www.ers.usda.gov/Data/ARMS/ accessed June

12, 2006.

USDA. Farm Service Agency. Report to Congress: Evaluating the Effectiveness of the Farm Service Agency’s Direct and

Guaranteed Farm Loan Programs. August 2006.

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Figure 1. Postal ZIP codes where direct FO borrowers received downpayment loans in fiscal 2005

Figure 2. Postal ZIP codes where direct FO borrowers received participation loans in fiscal 2005

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Figure 3. Postal ZIP codes where direct FO borrowers received regular direct FO loans in fiscal 2005

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Table 1. Distribution of beginning farmers receiving direct FO loans in FY2005, by loan type, production region, and

annual farm sales

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Table 2. Average balance sheets for beginning farmers receiving direct FO loans in fiscal 2005, post-loan closing.\1

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Table 3. Anticipated income statement and cash flows of beginning farmers receiving direct FO loans in fiscal 2005

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Table 4. Summary financial variables for beginning farmers receiving direct FO loans in fiscal 2005, post-loan closing