Michigan Farm News
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Challenges and opportunities for young, beginning and small farmers

Dollars and Sense

GreenStone FCS | May 3, 2017

Ashley Den Dulk

Farming is a challenging undertaking, with long days that start early and are filled with physical demands from running the tractor to calving cows to fixing equipment to repairing fence posts.

These demands are complicated by the need to stay current on best practices to increase efficiencies and production, and the need to meet the financial requirements of what is a capital-intensive business. These challenges are even more of a hurdle for young, beginning and small-farm operators.

One of the biggest obstacles young and beginning farmers face is they likely have limited capital to buy or rent land, to purchase equipment, or to acquire inputs such as seed and fertilizer. They also typically have limited equity in their farm operations, making it difficult to acquire either an operating line of credit or real estate loan through traditional programs. However, there are steps they can take to improve their ability to qualify for loan funding.

While it is true most farmers in these categories do not have significant capital levels, it is helpful to be able to demonstrate that you are actively managing your debt load and not maxing out your debt capacity.

You should be able to show your ability to repay the new debt you are seeking by developing realistic projections of income and expenses, and identifying your breakeven point. This shows the lender you have a strong understanding of your operation and its finances.

It is also valuable to demonstrate farming experience on an operation similar to your own. This can include working on your family’s farm or gaining mentorship working on another operation. This experience should involve making management decisions, such as which seed varieties to plant and when to apply fertilizer.

If you are not filing your own income and expense reports, a letter from the farm owner will suffice to prove your tenure on their operation. The Farm Service Agency (FSA), in particular, requires three years of farming experience.

Lenders like GreenStone will work with young and beginning farmers to find solutions in situations where there is limited collateral, and also have special credit standards in place for young, beginning and small farmers that allow lending outside the traditional scope, including reduced owner equity requirements, higher loan to value ratios, and lower working-capital requirements.

When working with young, beginning and small farmers who are utilizing a special program, lenders may add some additional conditions to the loan to reduce the risk and protect other borrower-owners.

Examples include requiring borrowers to provide an annual balance sheet and tax return to ensure everyone is on the same financial page, or require that payment checks when a crop/product is sold to be made out to both the farmer and the financial institution to help ensure that the borrower is managing their cash flow appropriately for long-term success as they are learning during the early stages of their operation.

Young, beginning and small farmers should also actively seek education and knowledge about their industry sector. For example, those raising grain need to understand the forwards market, pricing, market volatility and risk mitigation strategies against this volatility and to protect against crop losses. This learning can come from seminars, training sessions, commodity groups and other experienced farmers. GreenStone’s experienced staff can also be a resource for advice.

All in all, to be best positioned to qualify for future capital needs, young, beginning, and small farmers should always work to strengthen their financial management, build their credit by carrying limited debt, and improve their personal credit score through consistently meeting their payment obligations on time.  

Ashley den Dulk, Financial Services Officer, GreenStone Farm Credit Services

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