Farms are businesses, and as with any business, sound financial planning is crucial to success. Considering your farm finances is especially important for beginners getting started and for landowners considering farm transfers.
Beginning farmer finances and farm businesses
- Financial picture overview: consider your business plan and determine whether to seek financing
- Beginning farmer financing programs: potential funding sources
Before you start operating your farm or ranch, it’s very important to have a business plan. Sit down and think about what you want and how you will achieve it.
After following the steps below, you will:
- be prepared to run a viable business;
- know whether you need additional capital;
- be prepared to seek a loan or other money if you need it.
Set your own goals
Set long-term goals. Think about what you want your quality of life on the farm to be like, and think about what kind of land and production will get you there. Consider:
- annual income
- methods of production
- quantity and quality of production
Set short term objectives that will move you toward your long-term goals.
Make a budget
Farm expenses: How much will it cost to produce your crops?
Farm income: What will you make from the sale of your crops?
Other income and expenses: What other costs and earnings do you have? Consider off-farm jobs, car payments, credit card payments, etc
Living expenses: How much do you project you’ll need?
Use a template: Check out IRS Schedule F for a template to start from. Additionally, sample budgets for many crops can be found within publications at ATTRA and Missouri Alternatives Center. These usually exclude income estimates since markets vary widely by date and location
Run the cash flow
A basic cash flow analysis is a month-by-month list of all the money that comes into and out of the farm, with a calculation of total income and expenses. By looking at the dollars remaining or short each month, you can tell if you need outside cash (income, a loan, or alternative options) to finance the operation and living expenses.
- Create: Make your projected month-by-month cash flow analysis.
- Think of the timing: Not all of your costs and incomes will come at the same times. For example, crop planting expenses might occur April-June, harvest costs may be in September and October, and crop income would come in October and November. Will there be enough money in the bank from the income sources to make payments when they come due?
- Consider all enterprises: How will one enterprise support or feed off another? What happens if something goes wrong in one or more enterprises?
- Test for trouble: Try out some possible scenarios to adjust for a potential 10 percent sale price decline or 10 percent loss of production
Consider your plan
Farming experience: What knowledge and experience do you have that will allow you to do what you’re planning? What do you still need to learn?
Rental arrangements: Will there be rental arrangements used? How will they support your goals?
Down payment: Do you have savings or other resources to commit or place at risk to achieve your goals?
Previous Ownership/Management: Have you previously owned or managed significant property that demonstrates your ability to undertake the proposed responsibility of owning and managing your own farm assets now?
Improved vs. unimproved real estate: Is it cost effective for you to take unimproved real estate and make improvements yourself? Do you have the skills, financing or time to build facilities?
Collateral thinking: What do you have to pledge as security to a lender in exchange for a loan?
Emergency situations: What assets do you have that could be traded or sold for cash if something goes desperately wrong?
Do you need additional capital?
If you have made your business plan and determined you need additional money to get started, you have many options:
- Use savings
- Borrow from family or a business partner
- Consider a CSA model
- Seek other options
- Explore grant opportunities (See New Farmer Finance - Additional Sources below)
If you’re still looking for money, you can consider a loan. You should use your budget, cash flow analysis, and business plan to show a lender how your business works.
After considering their financial situations, new farmers and ranchers should look to five main funding sources.
Many banks participate with agencies in providing financing to beginning farmers including Aggie Bond programs and guarantee financing through USDA.
Although it is uncommon, some banks have created local beginning farmer financing initiatives that link funds from depositors to a special lending pool available to beginning farmers. Inquire with your local bank if such a program is available.
- Many property owners are willing to contract directly with a beginning farmer for sale of land, machinery, livestock, or other assets.
- Contracts can range from cash deals to share rent to work-in arrangements in which labor pays for part or all of the property.
- Farm Credit Services of America offers a Young, Beginning, and Small Producers loan for less-established producers.
- Designed for producers age 35 or younger, or with 10 years experience or less.
- Several states have created a tax-free bond program to assist beginners acquire farmland, buildings, equipment, etc.
- Some require management courses or business plans (a good idea for any investment).
- Nebraska: nifa.org or call 800.204.6432
- Other states: stateagfinance.org/
USDA Farm Service Agency (FSA) is the traditional lender of last resort and has its roots in providing funds to beginning farmers. They provide loans with funding Congress appropriates each year with a portion targeted toward beginning farmers.
Land Contract Guarantee Program
Landowners willing to sell land to beginning farmers and ranchers on contract can qualify for a government guarantee through FSA. This program will provide one of two types of guarantees, to be in effect for 10 years:
- “prompt payment” guarantee
- 90 percent principal loan value guarantee
Operating – Direct Loan
FSA can be used to purchase livestock, farm equipment, feed, seed, fuel, insurance or other operating expenses. Operating loans can also be used to pay for minor improvements to buildings, costs associated with land and water development, and to refinance debts under certain conditions.
- Per farm loan limit for direct operating is $300,000
- Five-year line of credit is also available
- “Graduation” to guaranteed or commercial credit is mandatory after seven years. The seven years can be consecutive or non-consecutive.
Operating – Guaranteed Loan
FSA guaranteed loans are available through local lenders or Farm Credit Services. While the financing is through the local bank, FSA provides a guarantee to the lender up to 95 percent. Interest rates cannot exceed the lender’s average farm customer rate. In certain instances under the Interest Assistance Program, FSA will provide assistance in lowering the interest rate up to 4 percent. The loan limit for guaranteed loans is $1,094,000 (2008), a rate adjusted for inflation each year.
- Applicant must be unable to obtain credit elsewhere and have an acceptable credit history.
Ownership – Direct
Loan can be used to purchase farmland, construct or repair buildings, or promote soil and water conservation. The loan limit for direct ownership loans is $300,000. Program eligibility criteria for a direct loan from FSA include:
- Sufficient education, training, and experience in managing or operating a farm.
- Applicant must have participated in the operation of a farm or ranch for at least three years out of the past 10 years.
- Applicant must be unable to obtain credit elsewhere and have an acceptable credit history.
Ownership – Down Payment Loan Program
Assistance with a down payment is provided by FSA.
- Beginning farmer provides a 5 percent down payment.
- FSA will then provide up to 45 percent toward the purchase, not to exceed its appraised value and not to exceed $500,000.
- With this $500,000 cap, the maximum FSA loan amount is $225,000. Note, however, that this is a cap on the amount of the FSA portion of the loan, not a cap on the value of the land to be acquired. The remaining 50 percent then comes from conventional sources, such as the local lender or seller-financing, with amortized payment over a 30-year period.
- FSA loan term is 20 years, with an interest rate that is 4 percent lower than the regular FSA direct farm ownership loan interest rate, but no less than 1.5 percent.
Ownership – Joint Financing 50/50 (Participation Loans)
This program does not require a down payment by the beginning farmer. FSA will provide up to 50 percent of the financing at an interest rate the same as the regular direct farm ownership loan program.
Ownership – Guaranteed Loans
This is similar to guaranteed operating loans, above.
For more information on FSA loan programs for beginning farmers, contact your county USDA FSA office or get an overview from the Center for Rural Affairs. Also, check out this Farm Service Agency Loans Guidebook from the National Young Farmers Coalition.
Unfortunately, there are very few grant opportunities available for beginning farmers and ranchers. Check to see if any of these may apply to your operation.
- Little Seedlings grant
- National Young Farmers Coalition's Young Farmer Grant
- Southern Maryland Farmer Mini-Grant Program
- Southeast Mass Ag Partnership TIE grant: $3,000
- Ethical Farming Fund's Farmraiser Grant - for livestock farmers near Pittsburg, Pennsylvania
- Frontera Farmer Foundation: Chicago area farms
- Fruit Guys Community Fund: $5,000 for current farmers
- New York's New Farmers Grant Fund
- New York State Veterans Farmer Grant Fund
- Blue Ridge Women in Agriculture's Sustainable Food and Agriculture Grant for Women in North Carolina
- Connecticut Farm Enterprise Transition Grant
- Kentucky Small Scale Farm Grant
- Western North Carolina Ag Options: $3,000 to $6,000 for current farmers
- Farmer Veteran Coalition - Fellowship Fund: $5,000 for startup expenses
- Tennessee Ag Enhancement
- Rodale Your 2 Cents
- Minnesota Livestock Investment Grant
- Lakewinds Organic Field Fund - $8,000 for organic development in the MN area
- Washington State Organic & Sustainable Farming Fund
- Whatcom Co. WA Farm Fund grant/loan
- Wisconsin 30x20 Grant - $5,000 for dairy farm improvement
- Texas Young Farmer Grant
- Food Animal Concerns Trust Fund-a-Farmer Project
- SARE farmer/rancher grants may be applicable, though they are not for farm/ranch start-up or operation
- NRCS EQIP conservation cost-share may be applicable, though also not for farm/ranch start-up or operation
- Massachusetts MEGA matching funds
- Rhode Island Local Ag & Seafood Act Grant
Other beginning farmer finance programs
- Carrot Project is a privately funded loan program in the northeast
- Various states provide beginning farmer finance programs, ranging from direct loans for special types of projects to guarantee financing
- List of states and programs - contact your state department of agriculture for details in your state
General production and marketing information - ATTRA
- Free information source for sustainable farmers
- ATTRA specialists research and send you publications about your interest area
- A number of topics are available online or by calling 800.346.9140.
Farm transition finances
- Tax incentive program info: For established landowners, helping a new farmer or rancher can take many forms and offer a variety of monetary, social, and personal rewards.
- Planning successful farm transitions: retirement planning support for older farmers
For established landowners, helping a new farmer or rancher can take many forms and offer a variety of monetary, social, and personal rewards.
In Nebraska there are two specific tax incentive programs to motivate farm and ranch owners to provide an opportunity to a beginning farmer or rancher: Beginning Farmer Tax Credit and Nebraska Investment Finance Authority (NIFA) Aggie Bond.
These two programs can be used in succession with one another to provide maximum benefit to the farm or ranch owner.
The Beginning Farmer Tax Credit Program provides a direct credit from the State of Nebraska (a similar program is also available in Iowa) to individuals who rent agricultural assets (land, facilities, breeding stock, and equipment) to a new farmer.
The tax credit incentives to landowners:
- 10 percent of rental income for cash rentals
- 15 percent of the cash equivalent of share rentals
- involve rental of land or equipment to a new farmer without a landowner stake in crops
- low risk for landowners
- more difficult for new farmers and ranchers
- provide for sharing of expenses and risks between the landowner and the tenant
- especially beneficial to new farmers/ranchers
- shared risk between landowner and new farmer
For a landowner to be eligible for a Nebraska tax credit under this program, the new farmer/rancher lessee must have a net worth less than $200,000. The new farmer must also be a legal resident, demonstrate adequate farming or livestock production experience, and provide a majority of the day-to-day physical labor and management of the operation.
Cash rental example: A beginning farmer leases 300 acres of crop ground for $150 per acre. This totals $45,000 in rental income to the landowner and would result in a state tax savings of $4,500 ($45,000 x 10 percent).
Share rental example: A beginning farmer/rancher leases 300 acres of crop ground on a 50/50 share basis. Corn is raised on the land, yielding 180 bushels per acre. Total crop amounts to 54,000 bushels. The owner's share of the crop is 27,000 bushels. The crop is sold for $3.50 per bushel. The owner's share of the income is $94,500. The result would be a tax credit to the landowner of $14,175 ($94,500 x 15 percent).
This program can be used prior to using the Aggie bond program offered by the Nebraska Investment Finance Authority described below.
If you are already renting to a beginning farmer, we encourage you to consider this program. The approval board meets quarterly to approve all applications. You can modify any current lease arrangements for approval by the board within your tax year and qualify for the credit now.
Since the early 1980s, the Nebraska Investment Finance Authority (NIFA) has been assisting agricultural Nebraska with its Beginning Farmer/Rancher Program. NIFA’s program is for purchase of agricultural real and personal property.
NIFA loan proceeds may only be used for an agricultural purpose in Nebraska.
Negotiating a Tax-exempt Loan
Once a qualified borrower finds a lender, interest income on the loan is tax-exempt to the lender (both federally and Nebraska state), thus enabling the lender to offer the borrower a reduced interest rate.
- Interest rate and all other loan terms are negotiated purely between the borrower and lender
- Lender’s interest rate offered to the borrower must be below the normal interest rate
- Anyone can lend - a lending institution such as a bank, a private seller-lender using a land contract, or a private investor lender
- Loan cannot go beyond 30 years
Beginning farmer/rancher definition and requirements
- Must materially and substantially participate in the agricultural operation
- Must be over 19 years of age
- No experience requirements
- Net worth cannot exceed $500,000
- Cannot already own substantial farmland - Substantial farmland is defined as greater than 30 percent of the farm median size for the county the land is in, or at any time valued at greater than $125,000. Acre size limits are based on census data, are periodically updated, and are listed in the NIFA program information. Substantial farmland refers purely to land used for an agricultural purpose. The value of a homestead on an acreage, for example, is not held against the borrower in comparing to previous ownership limits.
- Borrower’s main or sole source of income may come from sources other than agriculture
Reduced interest rate
Using NIFA’s program, the borrower can receive a reduced interest rate on:
- up to $469,200 for land or permanent agricultural improvements to the land.
- up to $62,500 for used equipment/machinery or breeding livestock.
The purchase price of the deal may be greater than these amounts, but the amount that exceeds these limits must be financed in a separate loan at the lender’s normal rate. Loan proceeds must go solely to the benefit of the borrower (the loan must be made to an individual borrower/spouse), not to a partnership or corporation.
Find out more
Going through the NIFA Beginning Farmer/Rancher Program can take as little as 30 to 45 days, depending on when an application is submitted in relation to NIFA’s regularly scheduled Board of Director’s meeting to pass the bond resolution. For more information, visit the NIFA website, contact Dudley Beyer at NIFA, or call NIFA at 800.204.6432.
For more information on other beginning farmer/rancher finance programs nationwide, click here.
If you are seriously considering helping a beginning farmer or working with an existing farmer or land owner and would like to discuss your circumstances to offer a winning situation for all parties involved, please contact the Center for Rural Affairs. An initial consultation is free and in-depth strategy sessions can be arranged on a fee basis. Contact firstname.lastname@example.org for more information.
America’s farmers and ranchers are aging. There are two main options for retiring farmers to pass on their life’s work:
- Transition a working business to a new owner
- Sell off the land, equipment, livestock and facilities piecemeal
The right choice for each landowner depends on:
- retirement income
- long-term care payments
- interests of heirs
- tax consequences
This information can aid planning for a successful retirement that provides income security and continued engagement with the the farm and a new farm family, if desired. Farmers and ranchers can transition out of production in a way that continues long-term conservation practices, shares their acquired knowledge of a lifetime, and maintains the farmstead as a landmark for farm and community.
Every farmer and rancher faces these inevitable decisions, yet an Iowa study found that two-thirds of farmers over age 65 had done little or no planning for retirement.