Whole Farm > Other > Industry Analysis

Fall 2013 considerations for beginning farmers

AgDM Newsletter
November 2013

The opportunities and challenges for beginning farmers have never been so pronounced. Extremes in interest rates, commodity price volatility, land values and rental rates are all converging to both encourage and prevent the entrance of new beginning farmers into production agriculture.

At the time this article was penned, a lack of appropriated funds has stalled the availability of several popular beginning farmer loans supported through the Farm Service Agency of the USDA. Earlier in the year the sequester had put a hold on funds destined for beginning farmer programs, which left some loans approved but unfulfilled and on hold. Eventually, the discord that is disrupting funding will be resolved and these loan programs will once again be a functioning asset to help start-up producers. Recently, the most popular of the beginning farmer loans is referred to as the “5-45-50” loan. In short, it is a 20-year term land purchasing loan requiring a 5 percent down payment from the producer. The FSA and a private lending institution provide 45 and 50 percent of the purchasing funds, respectively. The interest on a “5-45-50” loan is well below that of a conventional loan and could be as low as 1.5 percent. In summary, this is an excellent loan that many private lenders incorporate into their beginning farmer leading packages. For those considering this loan, you can still start the process through a private lender but the funds may not be available until sometime next year.

For a producer still establishing a financial foundation, access to inexpensive outside funding sources is important. Conditions are still favorable for ag borrowers, despite the absence of federal funds. Near record low interest rates still provide a key opportunity. Land purchase rates remain very low and will probably remain low through the end of the year. Data from the Federal Reserve Bank in Chicago suggests that fund availability remains especially high (since 2011) while loan demand is still quite low. The Federal Reserve Bank in Chicago publishes an index for both ag loan demand and fund availability and the spread between the two continues to be one of the widest in recent decades.

The cost of land will continue to be a hindrance for those needing to acquire additional land base to operate. Land values have continued to increase through the first part of this year, but a softer commodity market for the 2013 crop will help remove some of the pressure that has been driving land values higher. While a significant correction in land values is not anticipated anytime soon, the increasing value of land is slowing to what will likely be a holding pattern for several years. From the most recent Federal Reserve land value survey, land values in Iowa were steady in the second quarter of 2013, after an 18 percent increase from July 2012 to April 2013. If a beginning farmer is willing to be patient, land may be more affordable in the coming years. The downside will be little to no chance of having access to such low interest rates still being available when land values start to decline. The percentage of Iowa farmland owned by individuals under age 35 is at 4 percent, its highest level since the mid-1990s.

Farmland rental rates are expected to start to moderate in 2014, or at least remain close to steady on the average. This will help all producers and hopefully allow beginning farmers to better compete. The Beginning Farmer Tax Credit, a tax credit for landowners that rent to beginning farmers, continues to add some incentive and advantage to renting to a new producer. A certificate of approval is needed to claim this credit and can be applied for through the Iowa Agricultural Development Authority.

Beginning farmers are now faced with making their plans with more variability than ever before. For those in this class of producers, take advantage of the opportunities, but avoid over extending in case things get tight. Money is inexpensive to borrow but is not unlimited and still has to be repaid.

 

Shane Ellis, extension field specialist, 712-792-2364, shanee@iastate.edu